NEW YORK — A clubby corner of the mortgage market has sprung back to life thanks to the historic settlement between banks and governments over foreclosure practices.

Trading in so-called whole loans picked up after U.S. officials neared an agreement with five big banks that eliminated uncertainty over how those firms, which are the nation's biggest mortgage servicers, would have to make amends for alleged abuses. The settlement was finalized on Feb. 9.

Whole loans haven't been pooled into mortgage-backed securities where investors share in the interest-rate or credit risk. In the first two months of this year, more than $4 billion in whole loans were sold, according to estimates of loan broker Mission Capital Advisors based on transactions that it tracks. That compares with just $1.37 billion in the fourth quarter and $6.5 billion in all of 2011.

"If 2011 was like a Great Depression for residential loan investors, 2012 feels like a party," said David Tobin, principal of Mission Capital Advisors, a mortgage broker that has advised banks and the Federal Reserve.

Increased sales are the latest sign that banks are making headway in breaking the logjam of troubled loans that are weighing on their books and the U.S. housing recovery. Selling distressed loans is also a way for banks to meet the more rigid capital requirements set to be enforced this year.

To some degree, the development could speed the process of resetting housing values to levels that unchain borrowers from debt. By agreeing to sell loans at a discount to the current property value, the bank hands the asset to investors who use the margin to lower payments to borrowers, cut principal or relocate the borrower in the case of foreclosure, and still walk away with a profit.

Banks holding hundreds of billions of dollars of delinquent mortgage loans now have freer rein to resume sales because they can no longer be accused of bypassing the attorney generals' settlement process, say investors, brokers and analysts. The settlement has also put to rest concerns that any investment in whole loans could force the buyer to abide by some unknown requirement to which they might not agree.

Purchase prices on delinquent loans have crept up to about 63% to 65% of property values in recent months, up from about 60% to 62% six months ago, said Jason Kopcak, head of whole loan trading at Cantor Fitzgerald.

Trading has also picked up in higher-quality loans, Kopcak said, with buying from banks that need prime assets for income and that don't require much capital.

The Federal Reserve has also taken note. The New York Fed in February sold about $290 million worth of whole loans formerly held by Bear Stearns. The Fed sold another $460 million this month as it capitalized on demand for these loans.

Buyers are dominated by a handful of well-known companies in the mortgage business, including Selene Finance, a firm controlled by former Salomon Brothers bond pioneer Lewis Ranieri, Fortress Investment Management and private-equity firm Lone Star Funds, said Stanford Kurland, chief executive officer of PennyMac Mortgage Investment Trust (PMT), another investor.

Carrington Capital Management, also run by a former Salomon bond trader, also participates in the distressed loan market.

Citigroup (C), one of the five banks included in the foreclosure settlement, has sold more than $40 billion in loans since the first quarter of 2010, a spokesman said. Delinquent loan sales slowed in 2011, due to the lack of remaining inventory and demand, Citigroup said in a regulatory filing.

Representatives of JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Ally Financial (GMA.XX) declined to comment. A Wells Fargo & Co. spokeswoman didn't return calls.

While the foreclosure settlement boosted the whole loan market, there are other factors that suggest growth.

Some analysts say banks have strengthened balance sheets to the point where they can sell more delinquent home loans and withstand the losses. Signs that home prices are bottoming are also alleviating concern that long foreclosure processes will result in losses.

To be sure, banks loathe to give away profits can "work out" troubled mortgages on their own. Scrutiny over how banks handle loans that they originated might get in the way of sales, too, said Andrew Davidson, a mortgage bond consultant.

"If I'm a (bank), I'd be afraid to sell a loan to another servicer who is going to be more aggressive," said Davidson, a mortgage bond consultant. "You'll have this fear that you'll still be on the hook from a public relations standpoint, and maybe from an economic standpoint."

Nevertheless, some investors are expecting the opportunity to buy loans will continue for at least two more years. Not counting loans that have been bundled into mortgage-backed securities, $420 billion are in some stage of delinquency, according to PennyMac.

"Most of those loans are held by large banks that are under varying levels of pressure to reduce the level of distressed mortgage loans," Kurland said at a Citigroup conference this month. "We believe that this investment opportunity should continue for at least the next two years, if not longer."

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