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Hedge funds getting into the mortgage business

Thursday, July 31, 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 across 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.

Investment banks are eager to get rid of bad assets. Merrill Lynch & Co., for example, plans to sell mortgage-linked investments once valued at $30.6 billion for $6.7 billion to Lone Star Funds, a distressed-debt investor in Dallas.

Many of the hedge funds claim they can do a better job than banks or other investors of modifying mortgages at terms that consumers can afford.

"We're much easier to deal with than a bank," said Jacob Benaroya, managing partner of Biltmore Capital Group. "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 often are 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 or allows the borrower to turn over the keys in return for forgiving the balance.

Housing advocates say they hope the new investors will be more amenable to borrowers interests' than current mortgage holders, which have been widely criticized for being sluggish to modify loans amid an unprecedented volume of defaults.

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

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

Distressed debt investors emphasize that they are more willing to make changes than are most loan servicers, which collect and distribute mortgage payments.

"They've got too many loans and not enough people," said Matt Stadler, a principal with National Asset Direct, which owns about 750 loans and is looking to double that amount.

To negotiate new loan terms with borrowers, some companies are setting up their own loan servicing operations.

For example, Marathon Asset Management has its own loan servicer, Marix Servicing, to handle the loans it purchases and those for other companies.

The company's 49 employees handle no more than 200 cases each, compared with 500 or more for more typical loan servicing companies, President Rick Smith said.

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