Mortgage Bonds Drop Up to 22% in June as Some 2013 Gains Erased

U.S. home-loan bonds without government backing tumbled last month to leave several types of the debt trading at their lowest prices of the year.

Declines reached almost 22% in June among certain subprime-mortgage securities, according to a June 28 report by Bank of America Corp. While returns remain positive this year among subprime-backed bonds, including gains of 12.5% for those notes, losses in 2013 for other nonagency securities are as high as 4% and bonds tied to mortgages known as prime-jumbo and alt-A loans now trade below values at the end of last year, according to the report and data from Barclays PLC.

The debt is slumping, after soaring earlier this year, as concern that the Federal Reserve will curb its bond buying roils credit markets and boosts interest rates. Investors are also finding trading more difficult after an $8.7 billion sale of holdings by Lloyds Banking Group PLC in May that was the largest of its type since at least 2010 bloated dealer inventories.

“The nonagency market is likely to remain volatile over the near term,” New York-based Barclays analysts including Sandeep Bordia and Jasraj Vaidya wrote in a June 28 report. “We believe that current prices represent attractive entry points for investors with long-term capital, who are able to take some mark-to-market volatility.”

Typical prices for senior securities backed by option adjustable-rate mortgages dropped last week to 65.5 cents on the dollar, from 74 cents in mid-May, to fall below their value of 66 cents on Jan. 1, according to Barclays. The underlying loans can allow borrowers to pay less than the interest due by increasing how much they owe.

Securities tied to jumbo fixed-rate loans and ARMs and fixed alt-A mortgages have also fallen below their prices at the start of 2013, according to the bank. Jumbo mortgages are larger than government-supported Fannie Mae and Freddie Mac are allowed to finance; borrowers with alt-A loans often failed to document their incomes or bought investment properties.

Losses among some alt-A ARM securities reached as high as 13.4% last month, to create declines of 1.5% this year among those notes, according to Bank of America. Losses among jumbo securities reached as high as 8.5% in June, leaving some debt down 4% in 2013, according to the bank.

Many of the bonds that still have positive returns this year are “more reliant on recoveries on defaulted properties,” which can be improved by home price appreciation, Bank of America analysts Chris Flanagan, Ryan Asato and Justin Borst wrote.

Home prices climbed 12.1% in the 12 months through April, the most in more than seven years, according to an S&P/Case-Shiller index of values in 20 metropolitan areas.