Investors betting on default-prone mortgages

Texan investor Kyle Bass, who made bank in the last few years by betting against subprime debt before the crash, is raising money for a fund to buy home loan securities, Bloomberg News reported, joining several other investors who’ve opted to bet on default-prone mortgages.

Billionaire hedge-fund manager John Paulson and former Deutsche Bank trader Greg Lippmann have a similar strategy, Bloomberg noted; The moves come as faith mounts that Europe’s sovereign debt crisis will be contained. Even the riskiest mortgage securities are now priced to withstand an economic slump, investors think.

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“You can end up, even using severe assumptions on things such as home prices and defaults, with a very high yield based on the prices that bonds are trading at,” said Larry Penn, CEO of Ellington Financial. “Especially with interest rates this low, if you can buy something where you can end up with a double-digit yield under severe assumptions, that’s great.” [Bloomberg]