'Deleveraging' Likely To Spur Buying Activity.

Arlington, VA -- As banks and other mortgage investors struggle to "deleverage" their balance sheets, it's little wonder why private equity and hedge funds smell blood in the water.

Many expect a fire sale of subprime mortgage assets. And while sellers still far outnumber buyers, the growing presence of potential buyers lining up funds for "distressed assets" could actually help the financial sector de-leverage.

In a recent report, analyst Paul Miller and his colleagues at Friedman Billings Ramsey estimated last summer that the financial system would have to attract $150 billion to $250 billion of new, permanent capital to avoid a fire sale of mortgage assets. More recently, FBR upped its estimate of how much new capital would be required to $1 trillion.

The failure to attract that new capital would force banks to sell assets, depressing prices in an already weak market.

FBR estimates that prices for mortgage securities will fall to a level where buyers can expect a 15% rate of return for non-agency AAA rated securities. Today, those securities are trading "down to the mid-70s," FBR says. And spreads between rates on agency-backed mortgage securities and Treasury securities have widened to their highest level in more than two decades.

FBR estimates it will take another six to 12 months for "pricing pressure to alleviate" on these mortgage assets.

FBR's math shows that the mortgage investment sector is substantially leveraged at a time when market participants are increasingly wary about mortgage collateral. FBR says mortgage ...