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Two Homes Provide Clues into 'Toxic Asset'

Kelly Lin|CNBC Producer
Tuesday, 1 Jun 2010 | 2:22 PM ET
Martin Poole | Stockbyte | Getty Images

Several weeks ago CNBC bought a 'toxic asset', with the help of Fast Money trader Jon Najarian.

We paid $2,100 for a slice of an A1 bond containing mortgage loans—a mortgage backed security—the same kind of investments that contributed to the financial crisis.

Once again, they're gaining popularity on Wall Street. So CNBC made the purchase to explain how these products perform, reveal what's inside them, and to help investors decide whether they should be part of their portfolios.

While the bond we bought is doing okay right now, there may be problems on the horizon. So we mapped it out.

Our first stop: New York City, to a firm called SecondMarket, where we purchased our 'toxic asset.' SecondMarket specializes in selling securities like ours. It acts as a middleman or intermediary between buyers and sellers.

CNBC's Toxic Asset
CNBC recently purchased a toxic asset, with Jon Najarian, OptionMonster.com.

Elton Wells, head of structured products at the company, warns, "There's a problem loan [inside our security] that we had that foreclosed on. Because of that loan, there was a loss that was taken by the deal."

Which brought us to destination number two: our 'problem loan' was a mortgage on a home in Braintree, Mass., a middle-class Boston suburb. The home was recently liquidated, selling for only 40 percent of its original sale price of $370,000.

The bonds below our tranche took a hit. Luckily for CNBC, though, our piece of the pie is still money good. But there are at least four other loans in the bond that could take a bite out of our investment.

Data Source: Secondmarket, Inc.

Making the next stop on our 'toxic asset'tour: Keansburg, New Jersey, home to one of those four problem mortgages (meaning they're either delinquent or in foreclosure.)

We walked through the bank-owned, three bedroom, two bath cape, listed with Re/Max to get a closer look at one small piece of our investment. We can't disclose the home's location, but we can promise to keep monitoring the status of its mortgage, as well as the other loans in our 'toxic asset'.

Beyond New Jersey and Massachusetts, our MBS contains mortgages in many states, including those hardest hit by the housing crisis: California, Florida, Michigan, Nevada and Arizona.

The map here shows all the locations (12 states in all) and the percentage of loans in our bond from each state. At last check, nearly 30 percent of the mortgages were at least 60 days delinquent and about 20 percent were in foreclosure.

Only time will tell whether those numbers improve or worsen. Either way, they'll provide an important lesson about the potential risks and rewards of investments like our 'toxic asset." (The charts below offer more detail on delinquencies and foreclosures in the [overall] bond, as well as its total value).

You can read much more about toxic assets, mortgage backed securities and related investments here.

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