Last updated: April 2, 2009  08:32am
Biltmore Capital Group's Benaroya
By Erika Morphy

Jacob Benaroya is president and managing partner of Biltmore Capital Group, a locally-based hedge fund is looking to acquire distressed mortgage debt. To be sure there are plenty of opportunities out there; Biltmore, though, has largely been in a holding pattern in recent months. The reason, of course, is the anticipation of the government taking action to address the credit jogjam. After all, as Benaroya put it, the fund would be better off waiting to see what incentives the government offers rather than devoting pure equity to these purchases. Then there is the bid-ask spread, which has shown little sign of narrowing despite worsening economic conditions. Benaroya spoke with about these considerations and how he views the Obama Administration’s actions thus far. Tell me more about how your fund works.

Benaroya: We buy non-performing, unsecuritized mortgage whole loans. They are 90 or more days past due and they are usually single family residential. We buy these loans from variety of institutions, from investment banks to commercial banks to credit unions. A lot of institutions have had exposure to to non-performing mortgages, so there are plenty of options out there. How are you pricing these securities?

Benaroya: We buy them at fairly substantial discounts, not only to face value but also to collateral levels. And the exit strategy? The secondary market I guess?

Benaroya: Yes, the point is to turn a non-performing loan into a performing loan and then sell it back into secondary market. Another option is to refinance and have some other bank take on credit risk. Once we buy loans at a discount we service all loans that we buy ourselves by contacting the borrower. We forgive the principal and rewrite the loan in line with the current value of property and forgive all the underwater principal. How does the Obama Administration’s plan to stem foreclosures impact your strategy?

Benaroya: It doesn't really. Obama’s plan only helps loans backed by Fannie and Freddie. But those are not the types of loans we buy. What hopes or expectations do you have for the Public Private Investment Program?

Benaroya: Ultimately I hope it will help bridge the gap between what buyers are willing to pay for these securities or assets and what sellers are willing to accept. I hope to see it narrow the bid ask spread, in other words, to a manageable level. What about your fund in particular?

Benaroya: We have a $50 million fund that is completely unlevered right now that we set up for these purchases. Theoretically, let’s say the government does ten times leverage like what it is doing with TALF. That would deliver for us $550 million in purchasing. If we buy at 50 cents on the dollar that is $1 billion plus in purchasing power. We are talking about thousands and thousands of loans.

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