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Bond investors who financed the nation’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 Newport Beach’s 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 LPand 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 Pimco.
Investors are losing money because of places like Riverside, 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, 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.
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