August 6th, 2008
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New York (HedgeCo.Net) - Foreclosed properties present an opportunity, to some, of finding an otherwise unattainable home at a deeply discounted rate. For hedge funds, foreclosures could mean massive returns in the near future. That’s why dozens of hedge funds are quietly building their stake in the decimated U.S. mortgage market.
According to a report published by Philippines News, tens of thousands of distressed loans and foreclosed properties have been sold to hedge funds and other private equity groups.
Lone Star Funds, a Dallas based company that invests in distressed debt, snatched up a string of mortgage-linked investments from Merrill Lynch once valued at $30.6 billion, for $6.7 billion. It’s no surprise Merrill was quick to sell, seeing as how they were one of the biggest financial institutions to get hit by the subprime fallout last summer, writing down an estimated $25 billion.
"We’re much easier to deal with than a bank," said Jacob Benaroya, Managing Partner of Biltmore Capital Group, a hedge fund in New Jersey that has allotted $100 million a year to acquire mortgage debt. "We’ve bought [the loan] at enough of a discount that we can make special arrangements with the borrower."
Hedge funds stress they are more lenient than the banks and in turn, better to deal with. They may make special arrangements with the borrower, or have them turn in their house keys in exchange for forgiving the outstanding balance on the mortgage. The hedge funds then may then turn around and try to sell the property as soon as possible, or hold on to it for a while until market conditions are ideal.
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