Other articles by Alan Zibel:

Housing bill's impact to be 'modest' Worry, pessimism follow U.S. bailout of Fannie, Freddie Lenders vow quicker help on loan woes Fannie cuts down-payment rule to 3 percent to aid ailing market Arizona blackballed on some lender lists Bear Stearns bailout raises red flagsFourth quarter bleak for existing-home salesHome sales fell in 45 states in 4Q; Arizona down 38%Foreclosure crisis hitting Arizona hardFBI looking at financial firms in fraud probe

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Guess who holds your mortgage now? It's your friendly neighborhood hedge fund.

Dozens of hedge funds, private equity groups and other investors have plunged into the mortgage market in recent months, buying tens of thousands of distressed loans and foreclosed properties around the country. They hope to profit from the woes of banks and other investors holding mortgages that have dropped in value as home values sink and defaults soar.

Hedge funds are buying mortgages from Wall Street investment banks eager to get rid of bad assets. Merrill Lynch & Co., for example, said last week it is selling mortgage-linked investments once valued at $30.6 billion for $6.7 billion to distressed-debt investor Lone Star Funds.

Many of the hedge funds say they can do a better job than banks or other investors of modifying mortgages to help distressed homeowners.

"We're much easier to deal with than a bank," said Jacob Benaroya, managing partner of New Jersey-based Biltmore Capital Group, a hedge fund that's buying up to $100 million in mortgage debt per year. "We've bought (the loan) at enough of a discount that we can make special arrangements with the borrower."

However, the hedge funds acknowledge that the loans they purchase are often in such trouble that as many as one-half to two-thirds can't be salvaged. In that case, the fund obtains the property through foreclosure and tries to sell it off, or allows the borrower to turn over the house keys in return for forgiving the outstanding mortgage balance.

Hedge funds are pools of investment money designed to make a profit whether financial markets fall or rise. They can take on debt to help boost gains and they can sell short, or borrow securities and immediately sell them with the hope of buying them back at a lower price.

So far, housing advocates say they haven't yet seen the impact of hedge funds among the borrowers they counsel. But they hope these new investors will be more amenable to borrowers interests' than the current mortgage holders.

"I have been waiting for this to happen," said Gabe del Rio, vice president of lending at Community HousingWorks, a non-profit housing agency in San Diego. "It will equate to a deeper ability to modify mortgages."