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Subprime Mortgage Bonds Back In Fashion

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The home loans responsible for blowing up the housing market are regaining popularity.

Prices are climbing for some bonds backed by subprime mortgage loans given to higher risk borrowers, with one index rising 14 percent, according to the Wall Street Journal.

These home loans, given to anyone essentially with a pulse during the housing boom, saw massive defaults and helped cause the foreclosure crisis. Subprime bond investors suffered enormous losses in the crash--financial institutions collapsed because of subprime exposure.

Investors' belief that the housing market has finally hit bottom could be fueling their return to these riskier mortgages. Despite the mess that took place in 2008, investors are eager to try again. Investors who made hundreds of millions betting against subprime mortgage loans in 2007 jumping into the market for risky mortgage securities, say that today's subprime mortgage bonds are priced to withstand an economic slowdown, according to Bloomberg.

If demands for these kinds of bonds rise, banks may loosen up and do more lending to higher-risk borrowers. Already, some mortgage lenders may be starting to loosen standards, according to Time.

In addition, as the economy has started to recover, Americans are becoming less gun shy about taking on more debt. After de-leveraging in the years immediately following the recession, credit card use climbed last year, even as Americans contended with falling incomes, according to statistics from First Data.

But if history is any indication, a boost in investor appetite for these types of bonds may spell disaster. Indeed, the fallout from subprime is ongoing. The Securities and Exchange Commission sued six former Fannie Mae and Freddie Mac executives at the end of last year, alleging they misled the public about the mortgage giants' exposure to subprime mortgages during the crisis. In addition, the SEC may be preparing a lawsuit against some of the country's biggest banks over their subprime mortgage loan practices.

Still, the parties responsible for pushing the loans on borrowers and inflating their value to investors have largely avoided the government's wrath.

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