Unstructured Finance

Berkowitz, Ackman bets on Fannie and Freddie puzzle investors and policy buffs

On Thursday, the United States threw cold water on Bruce Berkowitz’s daring proposal to recapitalize mortgage finance behemoths Fannie Mae and Freddie Mac, saying the only way to revamp the home loan market is through proper housing finance reform.

Berkowitz’s Fairholme Capital Management said it wants to buy the mortgage-backed securities insurance businesses of Fannie and Freddie by bringing in $52 billion in new capital, in a bid to resolve the uncertain future of the mortgage financiers by freeing them from U.S. government control. For its part, the government said the way forward would be to create a new housing finance system in which private capital would play a pivotal role.

Up until a few days ago, the idea that the government would hand Fannie and Freddie back to private investors seemed unlikely. Now, the idea appears all but dead. This appears to be bad news for a number of well-known money managers – the most prominent of which are Fairholme and Bill Ackman’s Pershing Square – which recently scooped up shares in both companies.

“When you talk to anybody in Washington, there is an almost universal view that Fannie and Freddie should be a part of the past, that it is a broken model, and also that private investors in Fannie and Freddie shouldn’t realize any returns from those investments,” said Colin Teiccholtz, the co-head of fixed income trading at $14 billion Pine River Capital Management, in New York this week at the Reuters Global Investment Outlook Summit. He described a bet on a stock that relied on taking Fannie and Freddie private as “extreme optimism.”

On Friday, Ackman told Bloomberg TV that he sees “greater opportunity” in Fannie and Freddie common shares than their preferreds. He also said that his firm does not support Berkowitz’s plan.

The housing proposal that won’t die

One of the biggest economic stories this year has been the recovery in U.S. home prices. But for the more than 11 million homeowners stuck with a mortgage that’s worth more than the value of their home, it has felt more like being Bill Murray in the movie Groundhog Day.

The housing crisis may be over for Blackstone, Colony, American Homes 4 Rent and other deep-pocketed investment firms snapping up foreclosed homes with cheap money courtesy of the Federal Reserve, but for many Americans they are still living with it some five years later.

So maybe that’s why  a controversial idea of using the government’s power of condemnation to seize and restructure distressed mortgages in order to provide debt relief to struggling homeowners  just won’t go away, even though many think it’s unconstitutional and bond investors have rallied to savage the proposal.

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.

Pacino, Papandreou, Panetta, Paulson: Welcome to SALT 2013

The SkyBridge Alternatives Conference – the annual hedge fund blowout better known as SALT, is a month away. And the official agenda for the three-day bacchanal, which sees thousands of hedge fund investors, allocators and hedge fund hangers-on descend on Las Vegas in the second week of May, has been released.

Many regular SALT-goers will tell you, of course, that as the event has grown in popularity its official agenda has become but one part of the conference. A sideshow to goings-on inside the Bellagio are the unofficial meetings going on outside, in the hotel’s poolside cabanas.

But SALT gate-crashers – a growing group of people who don’t pay for tickets to the conference but rock up to the Bellagio to network poolside with SALT’s paying guests – will be disappointed to know that the cabanas are a costly and official part of the event this year. The bungalows were all scooped up by SALT organizers, according two people familiar with the plans, and offered to guests for $20,000 for duration of the conference, as part of a sponsorship package that includes branding and passes to attend the event.

Natural (at) selection

The answer to the moderator’s question was a resounding: yes. The question, asked to several credit hedge fund managers during a conference on Thursday, was: did you make money last year? In fact, the managers from Pine River, BlueMountain, Cerberus and Brevan Howard made a lot. But 2013 is not going to be so easy, they said.

Hedge funds that specialize in credit, especially those who focus on mortgage-backed securities (MBS), blasted past their stock market competitors in 2012. One of those traders, Steve Kuhn, was on stage for the aforementioned credit panel at Absolute Return’s Spring Symposium. Kuhn, a portfolio manager for Pine River Capital Management, saw his fixed income fund rise 35 percent last year.

Kuhn doesn’t see a repeat of those monster returns in 2013. It’s all about security selection this year, he said and that that selection process is going to require a lot of work. It’s a view we reported in early March, and one that Scott Stelzer, a CMBS specialist for Cerberus Capital Management and David Warren, the CEO of DW Investment Management and CIO for a Brevan Howard credit fund also echoed at the conference in mid-town Manhattan.

Hedge fund scorecard 2012: Mortgage masters win, Paulson on bottom again

Mortgage funds roared home with returns of almost 19 percent last year, trouncing all other hedge fund strategies and beating the S&P 500 stock index, which rose 13 percent.

BTG Pactual’s $245.5 million Distressed Mortgage Fund, which invests primarily in distressed non-agency Residential Mortgage-Backed Securities (RMBS), returned about 46 percent for the year, putting it at the top of HSBC Private Bank’s list of the Top 20 performing hedge funds and making it one of 2012′s best performing funds.  Bear in mind the the average hedge fund gained only 6 percent last year.

HSBC’s hedge fund platform features hundreds of funds, including many of the industry’s biggest and best known managers, and the bank releases regular performance updates throughout the year.

UF Weekend Reads

So it appears Uncle Ben a/k/a Fed Reserve Chairman Ben Bernanke finally gets it:  to fix the U.S. economy, you need to fix housing. The trouble is the Fed’s remedy of buying $40 billion worth of mortgage backed securities each month may  not do the trick.

Bernanke argues that buying MBS will push mortgage rates even lower–something that will spur loan refinancings and make it easier for people to buy a home. He believes a rush of new home buying will spur home construction and create job, jobs, jobs.

It sounds good. But the problem is the housing market is not suffering from high interest rates. With the 30-year mortgage rate already down to around 3.65 %, it’s not interest rates that’s keeping the housing market from taking off. Two years after the recession officially ended, far too many homeowners are still weighed down by debt–especially mortgage debt.

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