Unstructured Finance

Spinning single-family home investments into mortgage-backed securities

It’s generally been thought the main exit strategy for Wall Street-backed firms that are buying distressed homes to rent them out, is to convert to a REIT and file for an IPO. That attempt to cash-out on the single-family home trade has obvious benefits for the big institutional buyers but risks for retail investors as the math behind the buy-to-rent model becomes increasingly suspect.

But there’s another potential exit strategy for the institutional buyers beyond converting to a REIT or flipping homes earlier than anticipated and that’s becoming a home lender.

In Las Vegas, where the institutional buyers have been quite active the past six months, there’s talk about firms like Blackstone Group eventually providing financing to prospective buyers looking to acquire one of their single family homes. Buyers like Blackstone won’t comment on speculation about their single-family home management subsidiaries becoming defacto mortgage lenders. But it makes sense, especially in the case of Blackstone, which now owns more than 25,000 homes nationwide and says it intends to hold onto the homes and rent them out for several years.

If the institutional buyers are serious about renting out homes as opposed to being fast-money flippers, becoming a source of financing for prospective buyers may be the best way to guarantee there will buyers in the future. The financing could be part of a rent-to-own strategy, or a way to lure potential homeowners who might have difficulty getting a mortgage from a more conventional lender. National home builders long have had their own mortgage operations to help enable first-time buyers to get themselves into a new home.

And if the appetite is right, any loans issued by the national home buyers could be bundled into securities–the next wave of residential mortgage backed securities.

LightSquaredHarbingerCapital Inc.

By Matthew Goldstein

It’s no secret that LightSquared and Phil Falcone’s Harbinger Capital Partners long have been joined at the hip–especially since the $5 billion hedge fund is the wireless telecom’s biggest equity investor. And a recent financial statement for the Falcone-backed start-up makes it clearer than ever just how closely linked are the fortunes of LightSquared and Harbinger.

As we reported, the LightSquared document reveals that on July 1 the company got $263.8 million in new financing, of which $183.8 million came from hedge funds controlled by Harbinger and Falcone. The hedge fund is getting 2.9 million in warrants to purchase additional shares in LightSquared, which is facing the prospect of running-out of cash during the second-quarter of 2012.

On July 5, LightSquared issued a press release trumpeting that it had just secured $265 million in additional financing. The press release said the “capital was drawn from both existing investors as well as new investors in the company.” But it made no mention that more than 60 percent of the new source of funds was coming from Harbinger-controlled hedge funds. (The other unnamed “lenders” also got 1.3 million warrants to buy LightSquared shares).

Lightsquared loans suffer from interference

By Matthew Goldstein

It looks like the problems that Phil Falcone’s upstart wireless network may cause with some airline navigation systems may be impacting the price of the more than $1 billion in high-yield debt LightSquared has sold to hedge funds and mutual funds.

Over the past two weeks, the prevailing market price of LightSquared”s four-year term “junk” loans has slumped to about 95 cents on the dollar. That’s still a solid price for the high-yield offering that carries a 12 percent coupon. But it’s down considerably from late May, when the loans were fetching as much as 102 cents on the dollar.

LightSquared’s loans soared in the spring amid optimism that the prospects were looking good for the planned high-speed wireless network backed by Falcone and his Harbinger Capital Partners hedge fund. The optimism was fed by talk of a LightSquared initial public offering later this year, an infrastructure sharing agreement with telecom giant Sprint and a perceived increase in the value of its spectrum holdings.

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