July 27 (Bloomberg) -- Wells Fargo & Co., the bank that boosted its U.S. property-related holdings by acquiring rival Wachovia Corp., is adding to those investments with purchases of mortgage-backed bonds, even as Federal Reserve Chairman Ben S. Bernanke warns of another wave of defaults.

The bank reported its portfolio of real-estate securities, excluding those backed by the U.S. government, rose 6.6 percent last quarter to $41.2 billion. San Francisco-based Wells Fargo has been buying commercial-mortgage bonds because the debt has been available at “good” prices, said Tim Sloan, an executive vice president.

“We believe that there are good opportunities in investing in those securities,” Sloan said in a telephone interview on July 23. “There are good opportunities across the board today if you get the right people who can underwrite credit and can look into the deals and make sure you really understand what you’re investing in.”

Wells Fargo is betting it can pick up discount-priced assets amid the recession that began in December 2007. It runs the risk of getting caught in a new round of defaults as more commercial mortgages turn sour. Properties valued at more than $108 billion are now in default, foreclosure or bankruptcy, almost double the figure at the start of the year, Real Capital Analytics Inc. said earlier this month.

Deploying Deposits

Banks are buying mortgage-backed securities to put increased deposits to work as tighter lending standards and lower demand limit new loans. Holdings of residential- and commercial-mortgage bonds not backed by the U.S. government at the 25 largest American banks have climbed 4.9 percent this year, to $159.9 billion on July 15, according to Fed data released July 24. The banks are ranked by assets. The Fed figures include price changes; the Wells Fargo portfolio number reflects average balances.

Banks buying mortgage-backed debt, which caused much of the $1.5 trillion of writedowns and credit losses at the world’s largest financial companies since 2007, can be looked at “two ways,” said Thomas Atteberry at First Pacific Advisors LLC in Los Angeles.

“One is: Your past history tells me you don’t know how to assess this risk that well,” he said in an interview. “The other is: Well, you’re bright people, you won’t make that same mistake again. Personally, I’m not convinced of the latter.” Atteberry was Morningstar Inc.’s fixed-income manager of the year in 2008, sharing the award with colleague Robert Rodriguez.

Bailout Programs

A goal of Treasury Secretary Timothy Geithner’s $40 billion Public-Private Investment Program, under which private investors partner with taxpayers in funds buying these securities, is to remove impaired debt from banks’ balance sheets to free them for new lending. When announced in March, the PPIP was billed as targeting purchases of $1 trillion of loans and securities.

Wells Fargo, which received $25 billion of capital under the U.S. Troubled Asset Relief Program, owned an average of $138.1 billion of commercial-mortgage and construction loans last quarter, more than double the year-earlier level after its Jan. 2 purchase of Charlotte, North Carolina-based Wachovia.

Experience with the debt will help in the bank’s securities investing, according to Sloan, head of commercial, real estate and specialized financial services group in Wells Fargo’s wholesale banking division.

“You’ve got to take apart the deal,” he said in the interview. “We’re the largest commercial real estate lender in the country. We think we’ve got a terrific team of people.”

Commercial-Property Prices

U.S. commercial-property prices fell 7.6 percent in May from a month earlier, according to Moody’s Investors Service, bringing the total decline to 35 percent since the market’s peak.

Bernanke told lawmakers July 22 that a potential wave of defaults in the $3.5 trillion commercial-mortgage market as borrowers find it difficult to refinance may present a “difficult” challenge to the economy.

Mortgage-bond prices have rallied from record lows as the government unveiled programs to boost values and amid signs the recession may be easing, though much of the debt still trades at discounts unprecedented before 2008. Fixed-rate commercial- mortgage bonds rated AAA have returned an average of 15.1 percent this year, after prices fell more than 21.8 percent last year, according to Merrill Lynch & Co. index data. Those securities ended last week valued at about 87.6 cents on the dollar, compared with a low of 94 cents in the decade through 2007, according to the data.

Large bank holdings of “non-agency” mortgage securities have increased as refinancing and defaults reduced the size of the residential-bond market, which shrank 4.5 percent in the first quarter, Fed data show.

Wells Fargo’s portfolio of all debt securities rose 11.6 percent last quarter from the first quarter to an average balance of $180 billion, while average holdings of loans declined 2.5 percent to $833.9 billion, according to the statement.

The company’s shares, which have declined 39 percent from a September peak, climbed 75 cents today to $24.22 in New York Stock Exchange composite trading at 4:15 p.m.

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net

Last Updated: July 27, 2009 16:41 EDT