6.06.2007

More Talk about Hedge funds/private takeovers...

So, sorry for the absence. Frankly, there isn’t too much to say for me right now - just tryin to keep my nose down and be successful. These things are tougher these days than past times. One of those things.


A while ago I mentioned the purchase of Chrysler by Cerberus Capital, a private equity fund. I also mentioned that they had significant holdings, not the least of which is the company that owns the local CBS affiliate here in the Salt Lake area.


Today, it was announced that Cerberus has also just finalized the purchase of Option One mortgage from H&R Block. The price was the total of current assets, minus $300 million. To industry insiders, this is no surprise, and we knew it had been in the works for some time. I friend of mine who worked for them told me there was motion in that direction back in February - and I imagine it had been going for a lot longer than that.


A little research turns up the information that not only do they now own Option One, a very large national subprime mortgage lender, but they also own Aegis Mortgage, which runs (ran) a subprime lending arm, and GMAC financial services, a company that started out as an industrial bank in support of General Motors. Since its inception, GMAC has grown into the mortgage lending business by starting or buying companies like WMC Mortgage, another subprime lender. With its current holdings, Cerberus owns a large chunk of the subprime mortgage origination business in the country.


This interests me for more reasons than the obvious - I work in mortgage lending, and it interests me that private fund managers are seeing the same business opportunities in the "dent & scratch" world of mortgage lending, that many other private citizens see in the foreclosure market nationally right now. There is great opportunity to pick up homes from damaged or distressed owners right now, just as there is opportunity in picking up lenders from distressed owners or monetary investors.


Yesterday on the news I listened to a story about how the traffic in these acquisitions has increased in the last 12 months - so much so that there is some concern out there over a possible collapse of hedge funds or private investment funds. It’s because some of these deals have become so large that many, or most, funds can’t afford to walk in to the closing table and slap cash on the table anymore. These deals are financed through banks and letters of credit. There is concern that in order to attract the lending business from these fund managers, some very basic and logical approval steps get overlooked. It frankly looks a lot like what the residential lending landscape looked like 24 months ago. If you had a pulse and a last name, you could pretty much get a mortgage loan. The same is true right now for these fund managers, and banks are falling all over themselves to get that private equity fund business for the bank.


The problem is that the worst loans are made in the best of times. The cycle always churns, and we may be in for a big problem in the future.


And on another note... this is a test post for a new application called ByteScout Post2Blog... from what I can see, if it posts correctly, the application has no provision for assigning or editing categories to a post... perhaps it’s there and I just don’t know it yet...

5 comments:

That One Guy said...

I had to assign the labels after the fact... kind of negates the convenience factor...

Reach Upward said...

You know, I didn't care for Mel Brooks' Silent Movie, but this is your second post in a row that reminded me of it. The bad guys in the film was a big corporation named Engulf & Devour. The current hedge fund activity reminds me of that.

I worked for a bank in the early 80s that was in serious restructure mode. It was closing branches, refocusing assets, and bringing in a kick-butt management team. And it was all thanks to its lending policies of the previous decade when the bank had been in a good business cycle.

For a time, I worked with one former branch manager that had 'golden handcuffs' and had been busted back to collecting on all of the bad loans he had made. I felt sorry for the guy, because he had simply been carrying out central policies. But I was astounded to discover how poorly secured many of these loans were.

Indeed, the worst loans are made in the best of times.

OneHungMan said...

Had lunch with a couple of bankers yesterday before hitting the links. Both made no secret that their motto was "make the loan approval today and worry about the details tomorrow."

OneHung has said before that while there should be something for any Tom, Dick and Harry being held accountable for their financial decisions, shame on the lenders for working with these dirtbags in the first place.

Personally, OneHung is in favor of all the exotic lending that has become available (remember, OHM is still waiting for your advice on these "exotic" vehicles for his future condo purchase).

Anonymous said...

All the good work undone by one major factual innaccuracy. WMC Mortgage was purchased by GE Money, not GMAC

That One Guy said...

ahh... bingo bango bongo, you're right... the fact remains though that Cerberus has become a major player in less-than-prime residential finance.