Citi (C) And Bank of America (BAC) Buying Distressed Mortgages
Secretary Tim Geithner designed a plan to assist the largest banks to rid themselves of toxic mortgage assets, but now Citigroup (NYSE: C) and Bank of America (NYSE: BAC) are aggressively buying up those same securities in the secondary market, according to The NYPost.
Both Citi and Bank of America each have received $45 billion in federal rescue cash to help prop up the economy and increase their lending to businesses. But the banks' purchase of mortgage-backed securities, including some that use alt-A and option ARM as collateral, is having some traders question why they are buying those bad assets. Alt-A and option ARMs are widely recognized as the next mortgage type to see large increases in defaults.
An insider told The Post, "that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay."
Citi declined to comment, but Bank of America said its purchases of secondary-mortgage paper are part of its plans to get the mortgage securitization market going again. "Our purchases in [mortgage-backed securities] increase liquidity in the mortgage market allowing people to buy a home," said BofA spokesman Scott Silvestri.
While some observers agree that the buying helps unfreeze the mortgage market, others argue the banks are throwing away taxpayer funds instead of lending.
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