Wall Street's largest investment banks have found a way to profit once again on subprime mortgages originated before the 2008 financial crisis.

On Tuesday, BlackRock managed an auction of $7 billion of various assets for a European bank (one of the largest such sales in over a year). The auction included $4.6 billion in U.S. mortgage-backed securities, many of them issued during the heady days of 2006 and 2007 or earlier. Credit Suisse was among the major winners.

Within three hours, the Swiss bank's U.S. unit sold as much as 40% of the $1.8 billion in U.S. residential assets it acquired through the auction, a Credit Suisse sales agent in New York told clients Tuesday morning, after competing against major bank dealers, including the largest U.S. bank, JPMorgan Chase.

"We are allocating bonds as we speak so please sit tight for a few more minutes," the Credit Suisse salesperson told clients in a message obtained by American Banker. A spokesman for Credit Suisse did not respond to requests for comment, nor did a BlackRock spokesman.

Wall Street firms first made money on this kind of paper during the boom years by originating and purchasing subprime mortgages and packaging and selling those loans into bonds. Following the downturn, they bought these assets back at discounts. Now they are cashing in once more as home prices rise.

An unidentified Scandinavian bank hired BlackRock, the asset management giant, to offload a vast portfolio of debt securities backed by collateral ranging from U.S home loans to European commercial real estate, people familiar with the matter said.

The identity of the Scandinavian bank behind the sale is being closely guarded by dealers working to turn the bonds around for client purchases immediately.

Goldman Sachs and Citigroup were said to have also purchased bonds. A Citi spokesman declined to comment, and Goldman Sachs did not immediately respond.

This week's auction is the largest sale from a European-based bank since a year ago, and it closes in on a record-sized auction from Lloyds Bank, which in May 2013 offloaded $8.9 billion in vintage U.S. mortgage-backed securities, according to data firm Empirasign Strategies president Adam Murphy.

In February the Dutch government finished cashing in on $11.5 billion in mortgage-backed securities it acquired through its crisis bailout of ING Groep NV.

Investors' interest in residential mortgage securities has grown stronger as legacy supply matures and shrinks. The largest buyers are paying a premium to the market in order to obtain larger blocks of bonds, Credit Suisse received bids from 122 different accounts, and total buyer interest climbed as high as $18.7 billion in bids wanted, indicating interest to buy more than five times the market value of the list, according to the obtained messages. Ultimate bids were 2%-3% higher than the bank's own initial guidance of where the bonds were expected to trade.

The total current market value of the U.S. residential mortgage portion of the auction is about $3.5 billion of the notional $4.6 billion, the trader estimated.

Broker-dealers not involved in the trade claimed that demand for the lower quality credits appeared "sloppy," but that the higher quality notes looked to have traded very well.

As many as 647 senior and mezzanine bond notes were available for purchase, Bank of America analyst Alexander Batchvarov told clients ahead of the sale. The securities included $2.4 billion in subprime mortgage securities, $1.06 billion in adjustable-rate mortgage notes between prime and subprime credit and another $709 million in notes backed by fixed-rate home collateral.

BlackRock in July managed a $3.7 billion "all or none" sale of subprime mortgage-backed securities, which was then the largest of its kind to hit the market since 2010. That auction shook awake bank dealers and investors from a sleepy summer.

Subscribe Now

Authoritative analysis and perspective for every segment of the mortgage industry

30-Day Free Trial

Authoritative analysis and perspective for every segment of the mortgage industry