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Hedge funds buying distressed mortgages

The Associated Press

Wednesday, July 30, 2008

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 beaten-down 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 plummeted in value as home values sink and defaults soar.

They are buying them from Wall Street investment banks eager to rid themselves of bad assets. Merrill Lynch & Co., for example, said this week it would sell mortgage-linked investments once valued at $30.6 billion for just $6.7 billion to Lone Star Funds, a distressed-debt investor in Dallas.

Many of the hedge funds, run by former Wall Street and lending industry executives, claim they can do a better job than banks or other investors of modifying mortgages at terms consumers can afford.

"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 buy are often in such trouble that as many as two-thirds can't be salvaged. In that case, the fund obtains the property through foreclosure and tries to sell it off, or lets the borrower turn over the house keys in return for forgiving the outstanding mortgage balance.

Housing advocates say they hope these new investors will be more amenable to borrowers' interests than the current mortgage holders.

Still, there are some worries that desperate borrowers unwittingly may give up protections, such as the right to sue the original lender, when they agree to a modification.

"Borrowers are not represented by an attorney or anybody who can advise them about the legal effects of what they're signing," said Kurt Eggert, a professor at Chapman University's law school.