Big Investors Jumping Back Into Shaky Home Loans

nice to see that even the smart money is often dumb money......

schön zu sehen das selbst die großen oft genug danebenliegen......


The subprime mortgage business is in tatters: loan volume is plummeting, defaults are rising and some of the biggest lenders have cut back or shut down.

So what is the smart money — private equity, hedge funds and investment banks — doing? They are swooping in and taking over those battered businesses, seeing opportunity amid the wreckage.

>we will see down the road if this was "smart" money"....

>denke das wir erst in zukunft sagen können ob das wirklich alles so smart war

“There is a lot of money pent up,” said Steve Probst, national sales manager with Fairway Independent Mortgage, a lender based in Sun Prairie, Wis. “And a lot of people are betting that the market will snap back quickly.”

It is a risky proposition.
In many parts of the country, there is a glut of unsold homes. Defaults and foreclosures are rising, putting further pressure on home prices and mortgage lending. Some housing industry officials worry that the new infusion of capital may refuel aggressive and risky lending to people with poor credit, known as subprime borrowers, delaying a much needed winnowing of the business.

thanks to Northern Trust. more charts here from Barry Ritholtz http://tinyurl.com/3b5cle

Those dark clouds do not faze the new money in subprime. Among those making the biggest bets is Cerberus Capital Management, which first made its name investing in distressed debt. One of the country’s largest private equity firms, Cerberus has a record of making risky contrarian bets, including its recent agreement to take control of the troubled Chrysler Corporation for $7.4 billion.

Cerberus acquired control of the subprime lender Residential Capital last year, when it led an investment consortium that bought a 51 percent stake in G.M.A.C., the finance arm of General Motors. And in April, Cerberus, which also owns Aegis Mortgage, a subprime lender based in Houston, announced plans to acquire Option One, the troubled mortgage subsidiary of H&R Block.

Taken together, these acquisitions would make Cerberus the biggest subprime lender in the country, far ahead of large mortgage giants like Countrywide, Wells Fargo and others, according to first-quarter lending statistics from Inside Mortgage Finance.....

“They have certainly double-downed and have bought some extremely attractive operations — companies that have dominated their space,” said Brenda B. White, a managing director with Deloitte & Touche Corporate Finance. “But now they’re faced with executing on a plan, whatever that plan might be.”

>read this twice...what a statement...when you double down on something it is more a sign that they bought way to early. and everybody that bought subprime in 2006 was an not lets say it politely "not smart"....

>last euch das argument nochmal auf der zunge zergehen...wenn ich lese das einer "double down" geht heisst das für mich das hier im vorwege viel zu teuer gekauft worden ist. und wer wie in diesem fall in 2006 in den subprime markt eingestiegen ist der hat gelinde gesagt "nicht clever" gehandelt.

This year, when rising mortgage defaults and a credit squeeze on Wall Street have forced many subprime mortgage companies into bankruptcy, some analysts predict that the industry might shrink by a third or more. Many industry officials acknowledged that a shakeout was necessary to cull the industry of the lenders that led in making risky loans and forcing rivals to match them or lose business.

In the last several months, however, private equity firms and others have acquired, taken stakes in or provided fresh capital to companies that wrote nearly 20 percent of last year’s $600 billion in subprime loans. It is, analysts and industry officials suggest, an unusually quick and substantial bet on a distressed business that by most indications is in the early phases of a long-term retrenchment.

Yet trying to time the bottom of a sliding market has been tricky, even for smart-money investors like Cerberus.

For instance, rising defaults and the cost of buying back poorly performing loans from investors left Residential Capital with more than $1.5 billion in losses in the six months that ended in March and the losses are expected to continue. (In March, General Motors, which still owns 49 percent of G.M.A.C., was forced to put an additional $1 billion into the unit because of the division’s mortgage woes.)

Cerberus has insisted on a number of terms and conditions in its deal to buy Option One, suggesting that the firm has become more vigilant about not paying too much. ...

“The investment banks that were buying last year were buying at the high,” said Mr. Burns, who is now chief executive of Vantage Score, a company that provides credit scores that lenders use to evaluate borrowers. (Both Merrill and Morgan have said they are comfortable with what they paid for their subprime acquisitions.).....

“They’re taking enormous risks here in hoping that they’ll be able to stabilize these businesses, keep them going, and get the types of regulatory approval they need to originate and service mortgages,” said Rick Antonoff, a partner in the bankruptcy and restructuring practice at the law firm of Pillsbury Winthrop Shaw Pittman. “They have put a lot of capital in already, and it’s going to take additional capital to keep these businesses going for a while.”....

In April, Accredited Home Lender, a San Diego-based lender, raised $230 million in loans from Farallon Capital, an investment firm based in San Francisco. The mortgage company agreed to pay a 13 percent interest rate and penalties if it sought to pay off the debt ahead of time. The company also gave Farallon warrants that would allow it to increase its stake in Accredited to 19 percent, from 7 percent. The warrants allow Farallon to buy the company’s shares for $10 apiece, a discount to the stock’s $13.99 closing price yesterday.

>here the anti spin from Rodger Rafter ...they are often just throwing good money after bad money.

>oder oft genug wird auch einfach gutes geld schlechtem hinterhergeworfen.wie dies klasse beipsiel von Rodger Rafter beweist.

They announced today that a hedge fund (Farallon) will loan them $200 million at 13% interest for 5 years. That interest rate is already extremely high, given the state of the corporate debt market these days, but Farallon also gets 3.3 million warrants priced at $10 and "rights to purchase additional equity securities."

Farallon has an interest in keeping LEND afloat. They bought 1,975,000 shares during Q4 of 2006, most of that was probably above $30 as they hit 1,579,349 shares (a 6.3% stake) on November 2nd. http://tinyurl.com/ysrths

Another hedge fund, Second Curve Capital, that bought an 8.5 percent stake in Accredited in early February when the stock was trading at $25 to $30, has increased its stake in the company to 11.2 percent as the stock has fallen.

Citadel, an aspiring financial conglomerate based in Chicago, picked up the lending business of ResMae for just $22 million. Ellington Management, a hedge fund based in Greenwich, Conn., that specializes in mortgage-backed securities, has agreed to pay an undisclosed sum for the lending business of Fremont General, which has not made a subprime loan in almost three months and has cut 2,400 jobs in its lending business.....

“There is a lot of fear that expansion starts again because liquidity is coming in,” said Stephanie Christie, a senior vice president in charge of nonprime lending at Wells Fargo Home Mortgage. “The industry needs to be very serious about prudent underwriting and make sure we don’t go back to making bad loans.”...

disclosure: short KBW Mortgage Finance Index

to bad that nobody can short ceberus subrpime exposure.........

Investing in distress - The vultures take wing / economist

this could be indeed be one of the major markets in the next years to come........

das könnte in der tat einer der vielversprechenste märkte die nächste jahre über werden.....

Banks and hedge funds get ready to capitalise on corporate misery

SOME of them look back fondly on the bursting of the dotcom bubble; others feel nostalgic about the 1990s recession. Distressed-debt traders, who buy bonds no one else will touch, and turnaround specialists, who pull companies back from the brink, operate in a topsy-turvy world, where bad times are good and corporate wreckage yields rich rewards.

The pickings have been slimmer for vultures over the past three years, however. Corporate profits have proved annoyingly robust and plentiful credit has made refinancing sickeningly easy (see article).

Except for the odd scrap of rotting meat (mainly among car-parts makers and airlines) they have had little to sink their talons into. This has led to “category creep”.

Traditional distress funds have drifted reluctantly into risky, but still solvent, junk bonds and high-yield loans to keep business ticking along. Now thanks to the subprime-mortgage woes, hopes are rising that trouble is finally on its way, bringing with it outsized returns for those who trade in corporate casualties

Investment banks, readying themselves for the expected downturn, have been strengthening their distressed-securities groups. Goldman Sachs is on the lookout for subprime bargains and recently lured a lieutenant of Carl Icahn, an ageing raider, to its “special situations” group. The investment bank, wary of the “vulture” tag, says it merely wants to ensure it can make money at every stage of the business cycle. Barclays has poached an entire team from Oaktree Capital Management, which manages distressed-securities funds. Oaktree itself is raising a new $3 billion fund.

>and with implosions like back in the dot.com era........

>und mit implosionen wie zu besten dot.com zeiten......

Behind this cyclical burst of activity is a deeper trend. Distress, once the preserve of specialists, is now attracting the mainstream. Edward Altman, a finance professor, counts 170 institutions that invest primarily in distress, more than ever before, with an estimated $300 billion at their disposal .....

Vultures hope that feast will follow the recent famine. They believe the very lack of distress lately will mean the carrion is more plentiful when times eventually change. More junk bonds are being issued than ever before, more risky loans are being offered. And remarkably, this lending free-for-all continues despite a sharp drop in credit ratings, says Martin Fridson, editor of the indispensable Distressed Debt Investor. No one seems bothered that 17% of senior, unsecured junk-bond issues are on the lowest possible rung, compared with 2% in 1990.

Mr Altman, who has spent many years tracking financial junk, says he has never seen anything like today's market. His diagnosis: “almost insane”. The “glut” will surely end dramatically, he says. Mr Fridson reckons a recession could cause defaults to jump to unprecedented levels.

That is when vultures come into their own. When sentiment turns after a long bull run, the market usually overreacts. It loses all sense of distinction between basket cases and risky but viable firms. The distress can also trigger forced sales of potentially valuable assets. Those gutsy enough to swoop can enjoy rich pickings. For example, buyers of some troubled American power companies have seen triple-digit gains as shares have recovered, boosted by mergers. Some investors in struggling cable firms have also done superbly—though others, who bought well before prices hit bottom, have lost money.

New, and sometimes nasty
The next wave of distress will be unlike the last in two respects. First, commercial banks no longer dominate the process. According to Standard & Poor's, a rating agency, non-banks such as hedge funds now make roughly half of all high-yielding leveraged loans and hold the lion's share of the secondary market.

Indeed for many distressed borrowers, hedge funds have become the last, best hope of salvation. Accredited, a troubled subprime lender, was recently propped up by a $200m loan from San Francisco-based Farallon after banks withdrew support. The hedge fund charged a credit-card-like rate of interest. It also secured the right for ten years to buy over 3m Accredited shares for $10 each, a deal that will bring it huge returns if the lender pulls through. This is a variation on the “loan-to-own” strategy now popular among hedge funds: credit is extended in the hope that it can be converted to equity when the company fails to recover, allowing the lender-turned-owner to restructure the firm thoroughly.


>sounds like farallon are smart guys..... or are they are just doubling down? :-)

> hört sich so an als wenn farallon extrem clever ist...oder schmeissen sie schlechtem geld gutes hinterher..... :-)

Farallon has an interest in keeping LEND afloat. They bought 1,975,000 shares during Q4 of 2006, most of that was probably above $30 as they hit 1,579,349 shares (a 6.3% stake) on November 2nd.

thanks to rodger rafter http://tinyurl.com/yvmeww

Though hedge funds offer quicker, more creative solutions than banks did in the past, their tactics can upset other creditors. They have also ruffled the feathers of the private-equity firms that sponsor leveraged takeovers. Fearful that activist funds will make trouble in a downturn, the buy-out shops have started asking their banks to insert legal clauses that prevent their debt from being sold into such hands.

The second change is likely to cause conflict too. Borrowers' capital structures—the various layers of debt and equity, each with different rights in the event of default—are now more complex. It is less clear than it was who is entitled to what.

That is largely thanks to the explosion of “second-lien” lending. These loans are secured against a company's assets, but with fewer rights than more senior loans. Trouble is, these rights are not always clear. Second-lien lenders, who provided 75% more money in 2006 than the year before, have begun to exploit this fuzziness to challenge those above them in the pecking order.


“We could see some almighty bust-ups when the market turns and everyone's less understanding,” says Mo Meghji, who runs a restructuring boutique......

Which leaves just one question: what might trigger the next crunch? Nobody knows, but Mr Arbess suggests it may arrive disguised as good news. The turning point of the last cycle, he believes, was the merger of AOL and Time Warner. That deal exposed the kind of faulty logic that allows a money-losing internet firm to get the better of a profitable media giant. So don't hope for a $100 billion leveraged buy-out—unless you're a vulture

Home-loan house of cards ready to fall / fleckenstein

i really want to highlight the related links in this post. they are full of excellent data and charts.

ich möchte ausnahmsweise mal gesondert auf die im post verwendeten links hinweisen. diese unterfüttern das gesamtbild mit haufenweise charts und details.

The collapse of the subprime credit market may come this year, with a major subprime lender going broke. The repercussions will haunt us for years. (when you look at the great site from aaron "mortage lender implode-o-meter" http://ml-implode.com/ ( a must see!!!!!!!!!) you will agree that the collapse is already happening. / guckt euch die seite von aaron und ihr werdet sehen das der markt gerade implodiert.) ......

An optimistic lot, the Goldilocksters have been deaf to the increasing rumblings emanating from an arena that has powered our economy for the past few years: the housing market -- and specifically the financial dark matter/subprime credit spigot that has fueled its epic rise. (more on the topic subprime from russ winter http://wallstreetexaminer.com/blogs/winter/?p=301#more-301 / mehr zum thema subprime von russ winter)


Bird's-eye view of a bitter housing brew
This week brings an update on the deterioration, via comments from two very knowledgeable friends. One of them, a former top executive at a subprime lender (whose chronicling of the unwind has been amazingly accurate and timely), told me that serious issues are developing, and that large companies like New Century Financial , Accredited Home Lenders and NovaStar Financial will, in his words, "hit the wall" very soon. make sure you read this piece from russ winter on new and nova. he unmasked the scary details http://wallstreetexaminer.com/blogs/winter/?p=317#more-317 / für die ernüchternden detail unbedingt den link von russ winter lesen.)


He writes:
"We had a loan that was FPD (first-payment default) on a home in So Cal. It is a very nice high-end town that had a section of new homes built . . . in the low end of town. Normal homes sold for $1 million in value. In this new seven-home development, (homes) sold for $1.3 million to $1.5 million each. The homes you had to drive through to get to this place were worth $400,000 to $500,000. The market topped out, and now most of the seven homes are vacant -- worth no more than $900,000. Thus, all the lenders are sitting on losses of $400,000 to $600,000. This is just one of many that are happening daily. (make sure you read the jan. report from itulip on the situation in california http://www.itulip.com/forums/showthread.php?t=817 / für mehr infos den link von itulip lesen.)


"The commentary I am getting from field and legit brokers is that fraud is an out-of-control locomotive. (more on fraud http://www.mortgagefraudblog.com/ ) Stated-income loans are now finished for all the unemployed people around. We will quickly see cash-out loans curtailed. This vicious cycle has yet to play out. We are in the second inning of the unwinding.

"It is really getting serious. We had a borrower in So Cal who cut and pasted bank-statement copies of Washington Mutual to make it look like he had $400,000 average balances in his account to buy a $1.7 million home. Something did not seem right. Lo and behold, we checked very closely with the bank. The borrower had only $500 in his account. This is also just one of many examples happening daily.

"I am truly worried about the aftermath once it is resolved. It truly becomes a vicious cycle. Each time guidelines are pulled back, fewer buyers can buy homes. Thus, lower property values, and more people underwater. The debt piles up on homeowners' balance sheets, and people consume less.

"This will, and should, take years to play out. (Federal Reserve Chairman Ben) Bernanke will yield to the Lobby and the Street, trying once again to lower rates and allow people to bail themselves out, while in turn allowing the buyout firms of the world to overpay for the companies they buy with easy money. The game is so rigged against honesty, it boggles the mind. I worry about our children having a chance to have a future, at this point."

In the beginning, there was financial darkness
I am not as sure as he is that it will take "years" to play out. The damage will last for years, but the crackup that precedes the big damage will happen this year, I think. Meanwhile, the other friend, a broker who deals in the financial dark matter universe, noted that the risky BBB-minus tranche of the June 2002 ABX.HE (a synthetic version of assets backed by U.S. home loans) just traded at a new low -- down more than eight points from early September. Its credit-default swap has now blown out to 477 basis points. Although the BBB-minus tranche is just a fraction of the $1 trillion subprime market, it seems impossible to me that a train wreck there will not have ramifications. ......

At the time of publication, Bill Fleckenstein was short New Century Financial. ( so am i)