Could Hedge Funds Be Emerging As The New Mortgage Middleman?
Mortgage brokers receive most of their business through referrals. These referral sources include lawyers, builders, friends and realtors. Most often realtors refer business to mortgage brokers as clients who are buying a home often require assistance to finance the transaction. Since home buying has dropped to historic lows, the realtor referral source has become almost non-existent.
Now, where can brokers seek out new referral sources and potentially new mortgage clients? Hedge Funds! Yep, I said it -- hedge funds.
Hedge funds like Citadel, Lone Star Funds, Fortress and WL Ross & Co having been buying up mortgage notes at a significant discount to par. For example, banks will sell mortgage notes at 50% of their value, in order to clean up their credit strained balance sheets.
Hedge funds are not buying these notes from banks for altruistic purposes. To earn the handsome profits these funds expect, they have to figure out how to increase the value of these mortgage assets. One of the ways hedge funds have gone about this is by attempting to refinance borrowers out of their current loans and into other loans on a different bank's or the government's balance sheet.
For example, Borrower A has a loan that he attained through e*Trade (Nasdaq: ETFC), which Citadel now has on its books. Citadel wants to free up that money, and therefore, needs to refinance him into something else. Obviously, Citadel does not want to have to deal with 50,000 borrowers so now it has to go seek out mortgage companies and mortgage brokers to see if they can help refinance the loans in its portfolio.
The above scenario has been an ongoing process for the past few months. Several funds and mortgage companies are working together to refinance these loans. In fact, just yesterday, Dan Gilbert's Quicken Loans announced a deal to help Fortress Investment Group (NYSE: FIG) refinance loans that are on Fortress' balance sheet. Utilizing Quicken Loans to work on these loans is smart for Fortress because Quicken is one of the few companies who have the ability to close all types of loans across the entire United States.
Back in May, Fortress started two mortgage opportunity funds with $660 million in assets. At that time, FIG's Wes Edens said, "The prices of residential mortgage-backed securities to us seem to offer exceptional values compared to the actual risk." However, as home values have continued to fall since that time, the Wall Street Journal reported that the Fortress Mortgage Opportunities Fund was down about 30%. Hopefully, Quicken Loans will be able to come in and help Fortress refinance many of the mortgages included in the Fortress mortgage funds.
Lone Star Funds, Citadel and other funds are likely refinancing borrowers into a government sponsored loan called an FHA loan, which is guaranteed by the federal housing authority.
Hedge funds are becoming the new middleman in the "new" mortgage financing process. The hedge funds are buying the mortgage notes, hoping the borrower is wiling to refinance (or will pay to maturity) and then seeking out mortgage brokers and companies to refinance the borrowers. If the process works, the hedge funds make their alpha, and, potentially, we could have a more liquid and improved real estate market.
Create E-mail AlertRelated Categories
Insiders' BlogTrader Talk
Stocks Mentioned
+0.02
-0.14Related Entities
Sign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!
