Unstructured Finance

The nine lives of the eminent domain for mortgages debate

By Matthew Goldstein and Jennifer Ablan

Law professor Bob Hockett, widely credited with popularizing the idea of using eminent domain to restructure underwater mortgages, says he continues to be approached by yield-hungry angel investors looking for a way to help out struggling homeowners and make money at the same time.

He said an increasing number of wealthy investors on “both coasts” regularly reach out to him to get more information about how eminent domain would work and get a better read on “the prospects of municipalities adopting one or another variance of the plan.”

Hockett also is continuing to advise local officials in a variety of cities including some in New Jersey and New York (Irvington, N.J. and Yonkers, N.Y. for instance) on how they might use eminent domain to condemn, seize and restructure deeply underwater mortgages for homeowners determined to keep-up with their high monthly mortgage payments.

Local officials continue to consider the idea of eminent domain even after it ultimately was rejected in San Bernardino County, Calif., North Las Vegas and banks and bond investors sued Richmond, Calif., the municipality that is furthest along the path to condemning underwater mortgages. The lawsuit against Richmond was dismissed by a federal judge as being premature because the California city merely has said it is considering eminent domain but has yet to actually condemn any home loans.

The lawsuits, however, were something of a warning shot to local officials in Richmond and elsewhere that Wall Street will fight like tooth and nail against the plan that would effectively give municipalities the powers to rewrite mortgages and in the process reduce the value of the bonds the loans were packaged into it.

Carl Icahn in his own words

Icahn’s Big Year in investing and activism

By Jennifer Ablan and Matthew Goldstein

We held an hour-long discussion with Carl Icahn on Monday as part of our Reuters Global Investment Outlook Summit, going over everything from his spectacular year of performance to his thoughts on the excessive media coverage of activists like himself who push and prod corporate managers to return cash to investors. We also talked about the legacy he wants to leave.

There was much Icahn wouldn’t talk about on the advice of his lawyer, however. While he said he took a look at Microsoft, he won’t say why he decided not to join ValueAct’s Jeffrey Ubben’s activist campaign. He also stayed mum on any plans for his Las Vegas white elephant, the unfinished Fontainebleau Las Vegas resort, which he bought out of bankruptcy proceedings in 2010.

Never one to mince words, Icahn said he takes issue with Bill Ackman’s brand of activism which he believes borders on micromanaging by telling chief executive officers how to do their jobs. “I think Ackman is the opposite of what I believe in activism. You don’t go in and you don’t go tell the CEO how to run his company.”

This summer, it’s the John Paulson show

Hedge fund manager John Paulson has shunned the limelight in recent years but in recent weeks it’s a different story, with the 57-year-old manager not only giving his first ever TV interview, he’s also set to take the stand in one of the most closely-watched trials in the country – the civil case against former Goldman Sachs trader Fabrice Tourre.

Tourre’s lawyer Sean Coffey said in a Manhattan federal court on Friday morning they intended to call Paulson to testify in the trial. The U.S District Judge overseeing the trial estimated Paulson would probably take the stand August 1.

Tourre is accused of misleading investors on a 2007 subprime mortgage deal that Paulson’s hedge fund, Paulson & Co, was betting against. Paulson’s firm had actually helped to select the securities that were packaged into the deal. The SEC says Tourre told investors that Paulson’s firm was investing in Abacus, suggesting he expected the price of the securities to rise, when actually the hedge fund was shorting it.

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.

The retailization of the single family home rental play

By Matthew Goldstein

It started slowly but the push by Wall Street into the single family rental market is fast becoming a Main Street play as well.

Last year, one of the big stories on Wall Street and in the U.S. housing market was the push by institutional investors to raise billions of dollars to snap-up foreclosed homes and rent them out while waiting for the right time to sell them. It’s become the biggest “long” bet on housing for private equity giants like Blackstone, which has already spent close to $3 billion buying up more than 16,000 foreclosed homes.

And with Wall Street firms all projecting they can get an 8% return from renting out the the homes they acquire, the foreclosed home market has become a great yield play for yield-starved wealthy investors.

One more try at the Great Refi

By Matthew Goldstein

Don’t be surprised if President Obama includes a line or two in his State of Union address this evening about the need for a plan to allow millions of struggling homeowners whose mortgages are packaged into so-called private label mortgage-backed securities to get a chance to either refinance their loans or restructure them.

The Washington Post is reporting today that mortgage refinancing may be one of the laundry list of items Obama will talk about tonight. And for several months now, investors in private mortgage-securities–deals issued by Wall Street banks and financial firms and not guaranteed by Fannie or Freddie–have been quietly bracing for the Obama administration to move forward with a new refinancing effort.

Up until now, the federal government’s main attempts at trying to help homeowners take advantage of the Federal Reserve’s efforts to keep pushing interest rates to zero has been to prod banks and mortgage servicers to refinance home loans held in so-called agency debt guaranteed by Fannie and Freddie. But programs like HAMP and HARP have provided little relief to the millions of homeowners whose loans are held in private label securities.

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.

The gold rush in foreclosed homes picks up steam as mad money flows freely

By Matthew Goldstein

Institutional money keeps rushing into the market for foreclosed homes, with some big players snapping up homes at breakneck speed. But the question is whether the big buyers are throwing money around indiscriminately and Wall Street’s big housing long will come up a bit short.

The other day Bloomberg reported that Blackstone Group has already spent $2.5 billion to buy 16,000 homes to manage as rentals and eventually sell them when prices appreciate high enough. Blackstone says it’s finding that the going price for homes sold at foreclosure auctions and out of bank inventories are rising quicker than anticipated.

But Blackstone, which some believe could spend up to $5 billion on single family home space, isn’t alone in racing to snap-up foreclosed homes in states like Florida, Georgia, California, Nevada and Arizona. American Homes 4 Rent, a firm that has $600 million from the Alaska Permanent Fund, is buying up hundreds of homes a month, industry sources say. Colony Capital, the other big institutional player is no less aggressive.

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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