What's hot for 2011: Mortgage-backed Securities?

Remember those toxic assets that nearly wrecked the U.S. financial system back in 2008? They're back, even though housing isn't

It seems like only yesterday that virtually everyone thought mortgage-backed securities were evil. After all, the securities – backed by mortgages including subprime home loans – helped put the country's largest banks on the brink and the global economy into a dizzying downward spiral after the housing bust started.

In the years leading up to the financial crisis, as credit boomed in tandem with home sales, Wall Street shored up on mortgage-backed securities. At the time, at least, it was almost easy to see the appeal of betting on securities whose values depended on mortgage payments and housing prices. But when things went awry, these securities were akin to the plague – not just for Wall Street who reported big losses, but the folks on Main Street who linked the complex financial instruments with their economic woes.

It's true things are looking better today relative to what they did then, when Lehman Brothers went under and Bank of America (BAC) swept up Merrill Lynch in a panic. But the housing market isn't exactly rebounding, and the rate of foreclosures hasn't improved much. The latest Case Schiller Index reported that home prices nationwide declined 2% during the three months ending in September, after having risen 2.4% during the previous quarter. According to Zillow, home prices have lost $1.7 trillion in value in the past year.

Despite the gloom, a modest bright spot linked to housing is emerging on Wall Street. In its 2011 outlook, UBS (UBS) strategists declared that mortgage-backed securities are poised to be an attractive investment. This doesn't necessarily signal that defaults and foreclosures on home loans will totally recover anytime soon, UBS says. Ironically, some of the factors working against the housing market today are helping make the securities more appealing to investors.

These days, mortgage-backed securities come with relatively less risk, since banks have enforced much stricter lending standards. Fewer people are taking out new home loans, even while mortgage rates have fallen to record lows.