Subprime Bondholders May Lose $75 Billion in U.S. Housing Slump By Mark Pittman April 24 (Bloomberg) -- Bond investors who financed the U.S. housing boom are starting to pay the price for slumping home values and record delinquencies in subprime loans. They will lose as much as $75 billion on securities made up of millions of mortgages to people with poor credit, says Pacific Investment Management Co., manager of the world's biggest bond fund. Some of the $450 billion in subprime mortgage-backed debt sold last year has lost 37 percent, according to Merrill Lynch & Co. BlackRock Inc., AllianceBernstein Holding LP and Franklin Templeton Investments are vulnerable because investors have replaced banks and thrifts as the primary source of money for U.S. mortgages. More than $6 trillion of mortgage bonds are outstanding, dwarfing the amount of U.S. government debt by about 50 percent. ``Bond investors will be the ones who will take the losses,'' not the banks, said Scott Simon, who oversees $250 billion in asset-backed securities at Newport Beach, California- based Pimco, a unit of insurer Allianz SE in Munich. Investors are losing money because of places like Riverside County, California, where foreclosures almost tripled last quarter to 6,103 from a year earlier, the biggest increase in the U.S., according to Foreclosures.com. Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, used Riverside loans as collateral for $1.5 billion of bonds sold in January 2006. Some of the lowest-rated portions of the securities trade at 63 cents on the dollar, down from more than 100 cents in October, according to data compiled by Merrill Lynch. BlackRock, Franklin Templeton Investors in the Lehman bonds include New York-based BlackRock, which oversees $1 trillion of assets and AllianceBernstein, which manages $726 billion, according to filings with the Securities and Exchange Commission. Franklin Templeton, a San Mateo, California-based firm that oversees $565 billion, also bought the bonds, data compiled by Bloomberg show. Bond investors paid for the decade-long real estate expansion that led to a record 69 percent of Americans owning their own houses. Home buyers were able to get loans from banks, thrifts and mortgage companies who would then typically sell them to underwriters, freeing up cash for more lending. New York-based Lehman; Bear Stearns Cos., the biggest underwriter of mortgage bonds; Morgan Stanley, Wall Street's biggest real estate investor, and other securities firms packaged loans into bonds and then sold them. About two-thirds of mortgages get turned into bonds, up from 40 percent in 1990, when the market was $1.08 trillion and the country suffered its last real estate slump, according to data from the Federal Reserve and Fannie Mae in Washington. `More Lenient' Mortgage companies increased the amount of loans they provided when the economy was accelerating by accepting home buyers who previously couldn't obtain credit. These subprime mortgages totaled almost 20 percent of all new home loans last year, according to the Mortgage Bankers Association, a Washington-based trade group. When U.S. growth slowed and home prices stopped rising last year, delinquencies mounted. About 13 percent of subprime mortgages made in 2006 were delinquent after 12 months, with 6.65 percent considered ``seriously delinquent,'' or more than 90 days late, Standard & Poor's estimates. ``Underwriter standards have gotten progressively more lenient,'' said Mark Tecotzky, chief investment officer at Greenwich, Connecticut-based Ellington Management Group LLC, a $4 billion hedge fund that invests in mortgage bonds. `Feet to the Fire' Bondholders are as much to blame as lenders, Federal Deposit Insurance Corp. Chairwoman Sheila Bair in Washington says. ``We should hold the servicers' and the investors' feet to the fire on this,'' Bair said in testimony to the House Financial Services Committee last week. ``We did not have good market discipline with investors buying all these mortgages.'' Barney Frank, a Democrat from Massachusetts and chairman of the House Financial Services Committee, and Spencer Bachus of Alabama, the top Republican on the committee, said earlier this month that they favor legislation making bond investors liable for loans that end up in default. Investors say more regulation may dry up financing for homes, causing more delinquencies and damaging the economy. The bond market has reduced ``the cost of mortgage credit by linking investors and home-buying families through mortgage securitization,'' said George Miller, executive director for American Securitization Forum, an industry trade group for investors and underwriters in New York. Miller made the comments last week in testimony to the House Financial Services Committee. `Attractive Yield' Roger Bayston, director of fixed income at Franklin Templeton, which bought $800,000 of the Lehman bonds, said his firm hasn't lost money because it purchased the highest-rated portions of the securities. He would buy them again, he said. BlackRock bought the portion of the SAIL 2006-1 bonds rated AAA and due in six months because ``it offered an attractive yield relative to similar securities,'' said Aaron Read, fixed- income portfolio manager at the firm. The AAA rated part pays 8 basis points more than the London interbank offered rate in yield while securities based on credit-card payments and with the same ratings pay about 2 basis points or 3 basis points less than Libor, Read said. A basis point is 0.01 percentage point. AllianceBernstein spokeswoman Stephanie Giaramita didn't return calls seeking comment. Pimco's Simon said his firm is also only buying the highest-rated parts of mortgage bonds.