Where's My Windfall?

This has been a good year for investors, so the loss of one opportunity isn't crucial. Still, it's sad that the Treasury Department's Public-Private Investment Program, designed to deal with toxic mortgage-backed securities, hasn't worked out as well as I'd hoped. The government concocts a smart investment plan and insists that everyone get a crack at participating. But before the Treasury and the investment industry can get the program running, a new bull market diminishes its urgency. Once investment firms finally launch public PPIP products, it's too late for individual investors to get in at an attractive price.

Debt dump. The PPIP, which the Obama administration announced in March, lets banks offload busted commercial and residential mortgage-backed securities with the help of cheap U.S. credit. Relieved of such noxious assets, a bank can lend more freely, helping to stimulate the economy. The government can contribute up to $2 for every $1 you or I invest in any fund authorized to own PPIP-qualified securities. That should provide a floor for the price of the mortgages. As you wait for the principal value to climb, you collect some income from the interest thrown off by a fund's assets.

In March, these toxic assets fetched 20 cents on the dollar. By September, they hit 70 cents, says Curt Lyman, of HighTower Advisors, a financial-services firm in Palm Beach, Fla. Imagine the gain if a fund bought close to the bottom and leveraged it two or three to one. A few brave "vulture investors" and hedge funds pocketed such windfalls, says Lyman.

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You and I were supposed to have the same chance, but we didn't. First, the Treasury's painstaking selection of nine firms to manage PPIP assets, in new or existing funds, took from March until July. Bankers, less desperate by July, reasoned that if the Treasury was so eager to get these mortgage-backed assets, they should keep them. "They didn't have to sell anything," says Maury Fertig, of Relative Value Partners, an investment firm in Northbrook, Ill., that specializes in high-yielding assets. Fertig predicts that as public PPIP funds organize, "there will be a lack of inventory at the right price." That's not encouraging.

The first PPIP-eligible fund is Invesco Mortgage Capital (symbol IVR). Invesco had hoped to raise $500 million for the closed-end fund, but it attracted only $200 million. The fund borrowed another $630 million, effectively giving it control of $830 million in assets, most of which is invested in nontoxic, government-guaranteed mortgage instruments that yield about 5%. The fund began trading in July at $20 and closed on September 4 at that price, or 7% above its net asset value per share.

Fertig expects established closed-end income funds, such as NFJ Dividend, Interest and Premium Strategy (NFJ) and MFS MultiMarket Income Trust (MMT), to beat new PPIP funds. At $13, the NFJ fund trades at a 20% discount to NAV, and the MFS fund, at $6, trades at an 8% discount. The funds yield 4.6% and 7.6%, respectively.

AllianceBernstein, meanwhile, has filed a prospectus for Foursquare Capital, a real estate investment trust that would buy discounted mortgage securities. The proposed offering says "a significant amount of the proceeds" would go to PPIP investments. As of early September, the REIT was still in registration.

Lyman says a better idea is to take an indirect flier on distressed mortgages. He suggests shares of BB&T (BBT), a North Carolina-based regional bank that recently took over the assets, including billions in dud mortgages, of Colonial Bank, a failed Alabama-based institution. At $27, shares of BB&T -- which earlier this year cut its annual dividend rate from $1.88 per share to 60 cents after receiving a capital infusion from the Treasury -- yield just 2.3%. But BB&T has repaid Uncle Sam and is free to resume paying dividends at the earlier rate.