UPDATE 2-Invesco, Marathon say toxic assets hold value for PPIP

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By Nancy Leinfuss

MIAMI, Oct 27 (Reuters) - Managers of the U.S.'s toxic asset purchase plan on Tuesday said they can still produce good returns for investors despite a strong rally in residential mortgage bonds and other risky assets since March.

Bruce Richards, chief executive officer of Marathon Asset Management, shrugged off the notion that the price run-up will cut returns expected by investors buying into his fund, one of nine mandated by the U.S. Treasury to manage its public-private investment plan, or PPIP.

The assertions by Richards and Wilbur Ross, whose WL Ross & Co. is another PPIP manager, come amid speculation the firms are raising less money than expected for the funds meant to heal credit markets by buying bad assets from bank balance sheets. The program has already been scaled back significantly since March as banks have raised the capital to support their holdings and prevent fire sales.

"There's still some value to be squeezed out," Richard told Reuters at the IMN ABS East conference in Miami.

Some PPIP managers initially pitched returns of 15 percent to 20 percent, which many analysts have said are out of reach as prices of the bonds have risen dramatically. Much of the rally in risky residential and commercial mortgage-backed securities has come in anticipation of up to $40 billion in buying from the program, investors and analysts said.

The Treasury this month has confirmed Invesco and four other managers have raised the minimum $500 million needed to be eligible for matching U.S. funds, and to start purchasing the toxic assets. Marathon has not been confirmed but the Treasury has said it expects the remaining funds to achieve the fund-raising by the end of the month.

In the meantime, opportunities in the once-downtrodden securities are shrinking.

Spreads on subprime mortgage securities have contracted from their earlier double-digit yields in the high teens to levels of between 5 percent and 8 percent this year, even as delinquencies on the homes backing the bonds continues to rise, traders and investors said.

This has made the bonds less attractive, and "hard to find," said Ross, chairman and CEO of WL Ross & Co. LLC., the New York-based subsidiary of Invesco.

"You have to pick and choose. There are still good returns in some pieces of paper," said Ross, who said the price gains followed improvement in capital markets as well as the onset of government programs.

"RMBS spreads have come in by the 100's of basis points since earlier this year," said Ross.

PPIP was engineered by U.S. Treasury Secretary Timothy Geithner earlier this year to improve the flow of credit through the economy. In March, the Treasury had hoped the funds would take up to $1 trillion in the assets off bank books.

"The program was very cleverly designed and the Tresury did a good job," said Richards. He noted how it was the first time the U.S. Treasury hired money managers to manage its program.

The PPIP manager said after a three-year decline in residential house prices of around 33 percent, the market has stabilized over the last three months.

"We're in a troughing period and demand is starting to pick up," said Richards.

He pointed to other government programs that have successfully bolstered the market such as the $8,000 first-time home buyer tax credit, which is set to expire on Nov. 30. Low mortgage rates and purchases of foreclosed homes by investors has also supported the market.

Richards and Ross predicted further deterioration ahead for commercial real estate that is being buffeted by falling revenue and a lack of credit to refinance loans.

"A combination of economic and legal issues make CMBS a dangerous place right now. CMBS is tricky," Ross said. (Additional reporting by Al Yoon in New York)