Unstructured Finance

Some Hedge Funds Throwing in Keys as “Landlords”

By Matthew Goldstein and Jennifer Ablan

All year the big money has been talking up one of the more intriguing trades to emerge from the housing crisis: buying up foreclosed homes in large scale and rent those out for several years and then unload them when the price is right. But questions about the so-called rent-to-own trade are being raised now that an early mover in the space, hedge fund giant Och-Ziff Capital, is looking to cash in its chips now and is abandoning the idea of operating foreclosed homes as rental properties for years to come.

Now we’re not quite ready to declare the foreclosed home rent-to-own trade is dead as the tireless, prolific financial bloggers at ZeroHedge did in a good riff on our exclusive story on Och-Ziff’s decision. But Daniel Och’s concern that the income to be generated from renting out foreclosed homes may not be as high as originally anticipated bears close scrutiny because it could spell trouble for other hedge funds, private equity firms and smaller money managers counting on rental income to generate an annual 8 pct or greater return on investment.

Way back in March, when we first wrote about all the big money that was racing into the foreclosed home market, we noted that some were concerned that a lot of the newer entrants might not really up to the challenge of managing and renting single-family homes for the long haul. Historically, the business of buying, rehabbing and renting foreclosed homes has been a mom-and-pop endeavor, conducted by people with strong community roots. The skeptics wondered whether institutional players were too blinded by the potential to capture yield and overlooking the challenges that comes with bringing often vacant foreclosed homes up  to code and habitable conditions.

If the potential to rake in a consistently solid return from renting out single-family homes is disappearing, that could also spell the end of the federal government’s experiment to sell-off Fannie owned homes in bulk sales. The whole premise of the program sponsored by the Federal Housing Finance Agency was to find big money managers willing to rent single-family homes for at least three years before selling them. If rental yields are shrinking due a combination of rising operating costs and slower growth in rent prices, then the bulk sale trade looks less attractive.

That said, there doesn’t appear to be any let-up in the interest in the foreclosed home space. Every other week there is another conference about investing in foreclosed homes. Earlier this month, Americatalyst sponsored a closed-to-the media forum in Austin, Texas, attended by all the big shots in this market, where the hot topic was “Renting the Future.” And new funds managed by lesser-named money managers seem to crop up every day.

UF Weekend Reads

By Sam Forgione

This week’s Weekend Reads may drive you back to the big news of the week: The Debates.

Just as the candidates’ tone and tenor seemed to drive judgments as to who won and lost, some stories were written about sparring between politicians and bankers, billionaires on whether a bankrupt Mexican company should be let off the hook, the banks and the foreclosed-upon, and the more milder subject of volatility investing. In the case of the Foreign Policy and DealBook links, the attitudes of the parties involved seem more important than their logic. And a winner and a loser probably won’t come to you. At least here, unlike in the voting booths, you can stay undecided.

 

From Foreign Policy:

Mohamed El-Erian writes that politicians and bankers should stop putting each other down and start averting the next crisis.

The new Goldman way: Less cushy compensation?

By Lauren Tara LaCapra

On a conference call to discuss Goldman Sachs’ new chief financial officer yesterday, an analyst asked departing CFO David Viniar why he was leaving when the stock is at a historic low.

Viniar avoided the question by joking that his successor, Harvey Schwartz, would trump that performance. But some investors think they have a better way to fix Goldman’s stock slump: cut back further on comp.

Goldman has brought compensation costs down, in part, by firing, nudging into retirement, or happily accepting the resignation of people who make a whole lot of money. (Viniar, whose salary clocked in at $15.8 million last year, is among that group.) Overall, the bank reduced comp costs by $3.2 billion last year and has cut 3,400 staffers from its payroll since the end of 2010.

UF Weekend Reads

Two weeks of speechifying by the Dems and Reps has come to an end. Well not really–but the conventions are over. And for all the talk, there is one issue that got short-shrift–a solution to the nation’s still unfolding housing crisis.

Oh sure, there was talk about foreclosures and people struggling to pay the mortgages on their homes, but not a lot time for potential solutions.  And that’s unfortunate because as has been noted many times before, it’s going to be hard for the U.S. economy to take off as long as too many consumers are being crushed by mortgage debts they can barely afford.

Indeed, the disappointing August jobs report is a sober reminder of just how much work remains to get the economy humming again.  As we’ve said many times before on U,F it all still comes down to fixing housing, housing housing.

Outrage isn’t asleep it’s just gone underground

By Matthew Goldstein and Jennifer Ablan

Where is the outrage? A year ago, the Occupy Wall Street movement was just getting started, with mass demonstrations across the nation against corporate malfeasance and greed.

But now it’s been crickets and we don’t mean the game. There’s been no marching on Wall Street nor on the steps of Capitol Hill since the latest revelations of bad behavior in the financial sector. The populist uproar has been rather sedate in the face of the deepening scandal that big banks rigged Libor–a benchmark lending rate; JPMorgan Chase’s mounting losses from disastrous credit bets and a possible cover-up attempt; and the disappearance of customer funds from Iowa futures broker PFGBest, discovered after its founder tried to commit suicide and left a note outlining a 20-year fraud.

But the lack of populist rage doesn’t mean there’s a lack of concern about these and other scandals. We think that’s a misreading of the temperature of the American people. And if Wall Street thinks the average person doesn’t care about the nearly $6 billion trading loss at JPMorgan Chase, or the alleged Libor manipulation scandal , then the street is badly misjudging things.

UF Weekend Reads

It’s Libor all the time, just not for me.

Earlier I blogged about how the Libor scandal just isn’t getting me as worked up as it is for other journalists (see Joe Nocera’s column today in the NYT). It’s not that I don’t think allegations of market manipulation aren’t important. And this is nothing to take away from the groundbreaking reporting by my Reuters colleague Carrick Mollenkamp did on the matter back in 2008 while he was at the WSJ.

It’s just that in the scheme of things, the allegation that bankers may have conspired to keep Libor artificially low to make their institutions seem more solvent during the height of the financial crisis doesn’t chill me to the bone. Did anyone really believe those institutions were solvent during the crisis? Does anyone really believe banks with hundreds of billions of second-liens on their books and other poorly reserved loans are really solvent today?

We simply say the banks (except for maybe some in the euro zone) are solvent and whistle past the graveyard.

S&P calls baloney on Wall Street’s “cyclical” profit view

By Lauren Tara LaCapra

Ask a Wall Street CEO whether his bank will be able to make as much money as it used to make, once customers start trading and doing deals again. He will inevitably respond with some form of “Yes!”

Ask just about anyone else with a shred of common sense and the answer is more along the lines of “hahaha…you’re kidding, right?”

This conversation is known on Wall Street as the “Structural vs. Cyclical” debate. On the structural side, you’ve got those who are convinced that new regulations, higher capital requirements and clients’ mistrust of big, conflicted i-banks will keep  a lid on profits for firms like Goldman Sachs, JPMorgan and Morgan Stanley. On the cyclical side, you’ve got people like Goldman CEO Lloyd Blankfein and JPMorgan CEO Jamie Dimon, who keep insisting that everything will be just fine once various “headwinds” subside.

The eminent domain brush fire

By Matthew Goldstein

It didn’t take long for the powerful voices on Wall Street to rise up in protest over an intriguing and controversial idea to condemn distressed mortgages through local government’s power of eminent domain.

Two weeks after Jenn Ablan and I first reported that officials in San Bernardino County, Calif. were giving serious consideration to the novel idea being pushed by financier-backed Mortgage Resolution Partners, 18 financial trade groups are voicing strong objections. The groups, led by the Securities Industry and Financial Markets Association, are concerned that if local governments can seize underwater mortgages it might discourage bank lending. Why? The argument is that if it can happen now, who knows when local governments might move to condemn mortgages again–crisis or not.

The unified opposition may make it difficult for Mortgage Resolution Partners, which says it is talking to public officials in Nevada, Florida and on Capitol Hill, to get much traction for its plan outside of San Bernardino. And if San Bernardino County goes forward with using private money to buy-up underwater mortgages held by banks and in mortgage-backed securities, a U.S. Supreme Court lawsuit challenging the legality of the measure seems more than likely.

UF Weekend Reads

So there’s this election this Sunday in Greece and everyone–who follows the markets–is all excited. But at the end of the day, the main reason people in the markets are all up in arms is because they want to know who will get paid, in what order and most important–how much. Sadly, there’s too little focus on whether the right people/institutions are getting paid; let alone issues of social dignity and the quality of human existence. Guess that’s what the markets are all about, right?

But don’t let any of that stop you from saying thanks to your dad tomorrow. And for all of you dads out there—A Happy Father’s Day. Here then is Sam Forgione’s weekend reads:

 

From The New Republic:

Dierdre N. McCloskey spans the efforts of economists to gauge happiness.

From Foreign Affairs:

Layna Mosley offers a level analysis of euro zone government debt and how markets view it.

UF Weekend Reads

Here’s to getting out exclusive stories fast when need be. This week, pay close attention to Jamie Dimon, who will be on the congressional hot seat as he deals with questions over JPM’s $2 billion plus trading loss. And without further ado, here’s Sam Forgione’s weekend reads:

 

From Fortune:

Peter Elkind and Doris Burke add more arc to the “human drama” of MF Global’s collapse.

From The New York Times:

Ron Lieber has some tips to resolve the fear of falling behind on finances.

From Institutional Investor:

JP MorganChase’s trading loss could signal big changes for investment banks, writes Charles Wallace.

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