‘Big trade frenzy’ for bad loans
U.S. market for defaulted mortgages getting hot as prices soar
WASHINGTON — Sales of U.S. delinquent mortgages are accelerating as lenders rush to meet demand from hedge funds and private-equity firms that has sent prices surging.
Bank of America is marketing soured mortgages with a balance of about $3 billion, said David Tobin, principal at loan broker Mission Capital Advisors. JPMorgan Chase & Co. last month sold about $500 million of bad loans to Lone Star Funds, while Oak Hill Advisors LP bought $659 million of such debt from Freddie Mac, according to two people with knowledge of the deals, who asked not to be named because the sales are private.
The market for defaulted mortgages is heating up as Wall Street firms try to profit from the housing recovery, banks seek to avoid the added costs of holding delinquent debt, and the Department of Housing and Urban Development sells loans to reduce losses at the financially troubled Federal Housing Administration. A $3.9 billion HUD offer in June was the most competitive to date, drawing more buyers and bids than previous sales and setting off a flurry of auctions last month.
“It’s three forces conspiring to create a big trade frenzy,” Tobin said. “Sellers looking to sell, lots of buyers looking to buy and pretty good fundamentals, which are making pricing dramatically higher than in 2012.”
About $30 billion of bad loans were sold in the first half of this year, more than the approximately $25 billion traded in 2013, according to Michael Nierenberg, CEO of New Residential Investment Corp., a real estate trust that invests in mortgage-related assets, managed by an affiliate of Fortress Investment Group.
Another $30 billion of the debt probably will change hands in the second half, Nierenberg said in a telephone interview. PRICING FOR DEBT INCREASES
Wall Street buyers are acquiring the debt after foreclosure starts dropped this year to the lowest level since 2006 and house values soared in California, Phoenix and other markets hard-hit by the real estate crash.
House-price gains are starting to moderate, with the S&P/Case-Shiller index rising in May at the slowest pace in a year.
“You would think supply and slower home price growth would cause loan prices to weaken. However, the amount of capital raised for the sector has caused the pricing to increase,” Nierenberg said. “At some point with volatility in the markets increasing, we would expect prices to fall.”
The Freddie Mac portfolio sold in July for 76 cents on the dollar of unpaid principal balance, according to Tobin, whose New York-based firm has advised investors on almost $60 billion in commercial and residential loan deals since 2002. That compares with average nonperforming loan prices of 64.5 cents at the end of last year and 49 cents in January 2013, he said.
The Freddie Mac price “shocked” Laurence Penn, CEO of Ellington Financial in Old Greenwich, Conn.
“This market is getting very heady and you are seeing the supply come out in response to these prices,” Penn, whose firm bid on the Freddie Mac sale, said in an Aug. 7 conference call.
Lone Star Funds, the distressed-debt investment firm founded by Dallas billionaire John Grayken, paid almost 66 cents per dollar of unpaid balance at the June HUD auction, winning bids on all 16 loan pools.
“One could argue that Lone Star sweeping that sale is forcing other people to pay up if they want to get deals, because they got blanked,” said Tobin.
Since the HUD auctions in June, there have been about $9 billion in offerings of nonperforming and re-performing residential loans, said Patrick Dodman, a portfolio manager at Ellington responsible for residential whole-loan trading.
“This quarter is setting up for perhaps the highest flows post crisis,” Dodman said in a telephone interview.
Bank of America’s $3 billion sale, which is being offered in four pools, compares with $2.1 billion the Charlotte, N.C.-based lender sold in its most recent quarter. DEAL FOLLOWS SIMILAR SALES
JPMorgan’s $500 million deal with Lone Star follows similar sales earlier this year, including a $390 million offering that included some mortgages tied to homes in New York.
James David, a spokesman for Oak Hill at Kekst & Co., declined to comment on the Freddie Mac transaction. Oak Hill raised $1.2 billion last year for a distressed residential mortgage fund, according to an October statement.
The Freddie Mac auction attracted 22 bidders and was the first by the McLean, Va.-based mortgage company, which backs $1.9 trillion of housing debt. Fannie Mae and Freddie Mac, under government conservatorship since the 2008 financial crisis, had about $320 billion in loans on their books that were nonperforming or re-performing after missed payments as of June 30, according to regulatory filings, some of which could come to market as prices for soured mortgages rise.
“Given where pricing is headed, it’s safe to expect Fannie and Freddie to be another entrant into this marketplace sooner rather than later,” Tobin said. “If their first deal goes off at 76, then succeeding deals will probably go off even higher.”
Fannie Mae will “evaluate those opportunities,” Fannie Mae CFO David Benson said on an Aug. 7 conference call.
HUD plans at least one more sale in 2014 and one sale per quarter in coming years, said Cameron French, a spokesman. The FHA had more than 437,000 seriously delinquent loans as of June 30, according to the Mortgage Bankers Association. PRICE INCREASES DETER SOME
Higher prices are deterring some investors who bought delinquent loans earlier this year.
New Residential purchased $500 million of nonperforming loans, or NPLs, from a bank in the second quarter and isn’t eager to buy more, Nierenberg said last week.
While rising prices are squeezing potential margins, Wall Street-backed in- vestors are able to increase their returns by using low-cost debt to finance their purchases.
Bayview Asset Management, a Coral Gables, Fla.-based investment firm backed by Blackstone Group; bond pioneer Lewis Ranieri’s Houston-based Selene Finance; and Lone Star are among the firms that have sold securities backed by delinquent loans this year.
Lenders, including some of the banks that are selling nonperforming loan portfolios, are offering debt as high as 70 percent of the portfolio price, according to Gary McCarthy, a partner at HMC Assets in Redondo Beach, Calif. “Certainly the securitization and debt markets are making money more readily available less expensive,” said McCarthy, whose firm won six HUD loan portfolios with an unpaid balance of $576.6 million, financed partly with debt from three banks. MORE CHASE SOURED DEBT
More firms — including Donald Mullen’s Pretium Partners and hedge funds Metacapital Management and One William Street Capital Management — are seeking to acquire the soured debt. Wall Street-backed companies that have built home-rental businesses, including American Homes 4 Rent, Starwood Waypoint Residential Trust, Altisource Residential and Axonic Capital are also buying nonperforming loans to expand their property holdings.
“There’s continuing demand and new entrants coming into market,” said Justin Berman, a former Goldman Sachs banker who runs Berman Capital Advisors, a private wealth firm in Atlanta that invests in delinquent loans through a New York- based company. “It’s a good trade as long as you can digest the loans in your system and work through them the right way.”