Optimists may view the creation of Two Harbors Investment Corp., a real estate investment trust set up to invest in discounted and distressed mortgage securities, as a sign of a housing turnaround.

Instead, Steve Kuhn, one of the co-chief-investment officers and a former asset manager at Goldman Sachs Group Inc. (GS), views it as a way to make money from the complexities of opaque investment products that burned a large swath of investors and fueled the downfall of storied Wall Street firms.

A part of the investment strategy for Two Harbors' - a REIT whose creation was announced Thursday - is to earn returns from mortgage securities including subprime debt, such as those made up of option ARMs and Alt-A mortgages, which may reside in complex structures such as collateralized-debt obligations.

The REIT's management team members are "experts at those structures," Kuhn said in an interview Friday, and "that can mean a big difference in value."

Option adjustable-rate mortgages, or option ARMs, are a risky type of home loan that allowed borrowers to make only minimal payments in the early years. The balance of such loans increases when borrowers choose to pay less than the normal interest due. Alt-A loans typically allowed borrowers to avoid fully documenting their income or assets.

Collateralized-debt obligations, or CDOs, are complex structured investments put together by Wall Street firms. They are typically made up of mortgage bonds backed by pools of home loans. CDOs are divvied up into slices based on their risks and returns and sold to investors such as hedge funds, insurance companies and pension funds. Many CDOs also reside on the books of Wall Street firms.

As strapped homeowners increasingly fell behind on their mortgage payments, these investments racked up devastating losses, including at Citigroup Inc. (C); fueled the demise of Wall Street icons such as Bear Stearns; and played a major role in the hefty bailout of insurance giant American International Group Inc. (AIG) by the U.S. government.

Two Harbors is seeking to make money off mortgage securities that may be residing within these out-of-favor structured investments. The new management hopes to do so by spotting opportunities within their dense structures.

The REIT is "focused on who the borrower groups are (and) also the cash flow structure of the security," Two Harbors' Kuhn said.

For instance, one CDO may differ from another in several ways. Some deals gave more rights to investors of the senior, higher-rated slices while others allowed the investors in the lower-rated pieces a veto vote. Some allowed the acceleration of payments to senior noteholders or gave them a say in the sale of assets within a CDO during stressful times. Others contained provisions that diverted payments from the underlying collateral of mortgage loans to first pay off senior investors.

A part of Two Harbors' investment strategy is about "understanding those rules," Kuhn said.

In some instances, the prospectus or the document used while marketing the CDOs to investors subtly differed from the actual contract or indenture. In others, terms and conditions may have appeared in places or in parts of the documents where investors are unlikely to look for them.

Two Harbors' other co-chief-investment officer, Bill Roth, will join the company Tuesday after having worked at Citigroup since 1981. Most recently, Roth was a part of Citi's trading group that invested the bank's funds in asset-backed securities, including mortgages.

Two Harbors will also invest in mortgage securities falling under the umbrella of Fannie Mae (FNM) and Freddie Mac (FRE), the two government-controlled mortgage finance giants.

-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com