A Mortgage Bond Boom Isn’t a Housing Recovery

Photographer: Gianluca Colla/Bloomberg

In the mortgage bond boom, banks and hedge funds, not homeowners and debtors, stand to gain most.

The new issue of Bloomberg Markets magazine looks at the year’s best-performing hedge funds. Topping the list are several that have invested in mortgages, led by the 38 percent return at Deepak Narula’s Metacapital. Within this winning category there are funds that invest in Fannie and Freddie-backed mortgages, and (believe it or not) in subprime. For everything there is a price and a time.

Housing has risen this year, with a 4.3 percent gain in the S&P/Case-Shiller home price index. As is usually the case with housing, it doesn’t take much for the word “recovery” to start getting tossed around. Don’t confuse mortgage bonds with housing. The Big Picture’s Barry Ritholtz has several times charted the long run view of home prices, and they’re still above the historical average relative to household income. (Standard & Poor’s Co.’s David Blitzer shows them slipping below historical norms compared to per capita income; with changing family sizes, that’s  the wrong measure.)

Narula gives some detailed insight into his strategy, and it’s worth reading for the view it affords not only into his fund, but into the housing economy. He’s gained with bets that mortgages would rise relative to Treasury bonds, and that fewer debtors would be able to refinance than the U.S. government hoped.

That reveals some painful truths about the housing recovery. Low rates have made housing relatively more affordable … for those who haven’t been locked out of the market by credit standards that are much tighter than they were even before the housing boom. The winners in a concerted Federal effort to keep housing afloat are banks, investors, and the limited group of homeowners who’ve been able to finance purchases at low rates.

The losers, on the other hand, are those who have cash but little creditworthiness, or those who buy homes expecting they will steadily gain value over the next decades. In the short term, the government has given banks and mortgage investors a comfortable cushion. For housing over the long term, it looks like less of a soft landing than a long slow descent.

Hedge Fund Bonus Round: Hey, where’s James Simons’s Renaissance Technologies? Bloomberg’s rankings editor Laurie Meisler says that the Renaissance Institutional Equities Fund just missed the list, with a gain through October of 8.7%, and Renaissance’s Institutional Futures Fund had negative returns. Simons’s longtime flagship, Medallion, is now run almost exclusively for employees, as last year’s story notes, and excluded from the rankings. How the Medallion fund achieved decades of outsized returns, and why other RenTec funds (update: to be clear, funds with very different strategies) don’t seem to be able to match it, are two of the most interesting questions in hedge fund world.

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