It looks like the Sage of Omaha himself could be planning to get into the mortgage Real Estate Investment Trust (mREIT) business. Bloomberg reported that Warren Buffett's company, Berkshire Hathaway (BRK.A), has filed papers that state an intention to buy at least part of ResCap Financial's loan portfolio. ResCap is the bankrupt privately-held mREIT controlled by Ally Financial (ALLY).
The court papers indicate that Berkshire is offering more money for the ResCap holdings than Ally and Fortress Investment Group LLC (FIG).
On June 18, Martin Glenn, a U.S. bankruptcy judge in New York, is supposed to schedule an auction for the ResCap assets. Fortress has reportedly offered $2.4 billion for ResCap's mortgage unit, but Berkshire has reportedly matched Fortress's offer.
Ally is also trying to buy back at least part of ResCap's loan portfolio for around $1 billion. That could indicate that Ally wants to stay in the mREIT business. Ally's principal business is car finance; it used to be the General Motors Acceptance Corporation, or GMAC, the company that created car finance.
Buffett Already Tried to Buy ResCap
Interestingly enough, Berkshire Hathaway already has a stake in ResCap; it owns around $900 million worth of the company's unsecured junior bonds. Berkshire has been involved in the ResCap deal in order to protect this investment.
Buffett showed some of his legendary savvy in a maneuver before this deal. An unconfirmed rumor reported by Bloomberg stated that Berkshire tried to buy ResCap for little or no money. Ally apparently turned down the deal, which would have let Berkshire take on some of ResCap's lawsuit liabilities. Ally turned down the offer because its executives felt that bankruptcy was a better deal for them.
The Bloomberg report did not say what Mr. Buffett intends to do with the ResCap loans he's preparing to buy. The most likely possibility would be to set up a privately-held mREIT that is associated with Berkshire Hathaway. Another might be for Berkshire itself to function as an mREIT.
There is also a possibility that Berkshire could launch a publicly-held mREIT to take advantage of this sector. After all, a number of companies, including Annaly (NLY) and Invesco, in the form of Invesco Mortgage Capital (IVR), have launched separate mREITs to handle specialized investments. This, of course, is simply speculation, and it is also possible that Mr. Buffett will simply sell off the loans when his bonds become due next year.
Buffett is Already in the Real Estate Business
The involvement of Warren Buffett in this arena is really good news for mREIT stocks. Buffett's reputation as a conservative who does his homework should convince a lot of investors that mREITs are safe and a good deal. All mREIT stocks should go up because of this. Fortress, in particular, could see a boost in stock value because it will be seen as playing in Buffett's highly profitable neighborhood.
Buffett's involvement should convince other major investors to jump into the mREIT business. It could persuade more hedge funds and foreign capital to enter the area by making it look safer and respectable.
This deal could also be a sign that Buffett expects the mortgage crisis to end and home sales to increase. Buffett is already involved in the real estate business: Berkshire Hathaway already owns Home Services of America, which offers a package of services, including title, mortgage origination, brokerage, closing, and property and casualty insurance. Home Services owns several reality companies, including Prudential California and Realty South.
That means Buffett could offer mortgages from an mREIT through Home Services and its affiliates. Such an integrated business model would make a lot of sense in the current mortgage market.
Berkshire also owns Clayton Homes, the nation's largest manufacturer of mobile homes, so it might seek to compete with Fortress's Newcastle Investment in the manufactured housing sector.
Black Rock Predicts Mortgage Armageddon
The Obama Administrations efforts to help underwater homeowners could lead to mortgage Armageddon. At least that's the opinion of Barbara Novick, the Vice Chairman of BlackRock (BLK).
Novick told reporters that she thinks efforts like the Home Affordable Modification Program (HAMP) will encourage more and more underwater homeowners to stop paying their mortgages and seek refinance instead. She seemed to be worried that homeowners would simply sit tight and not pay because they are no longer afraid of foreclosure.
Novick was particularly critical of the robo-signing accord, an effort to settle lawsuits against banks over mortgage documents with fraudulent signatures. Novick called the accord unfair because it didn't require the banks to write off second lien debt. She also said it seems to reward banks for poor practices.
Novick's statement could affect mREIT stocks because mREITs invest in bond debt generated from mortgages. If mortgage defaults and foreclosures were to increase, or investors thought they would, there could be a panic and an mREIT selloff. Another danger is that investors will doubt the security and safety of mortgage bonds.
This could benefit companies that invest in government guaranteed paper, such as Hatteras Financial (HTS) and American Capital Agency (AGNC). Those firms and their paper could be seen as more secure because they are guaranteed by Freddie Mac and Fannie Mae.
One big danger to mREITs could occur if the Federal Housing Finance Agency (FHFA) gives Freddie Mac and Fannie Mae permission to forgive some underwater mortgages in a revamped HAMP. If that happened, it could reduce the pressure on homeowners to refinance, which could reduce business for some mREITs.
Novick thinks that such a move would drive private capital out of the mortgage market. The capital would leave because investors would not know whether mortgage contracts are any good or not.
That situation might benefit mREITs, which are more willing to take risks because they would have fewer competitors. If companies such as AG Mortgage Investment (MITT) and PennyMac Mortgage Investment Trust (PMT), which invest in non-guaranteed paper, are the only private players in the residential mortgage market, they will have a far larger market share.
Such companies would be in a position to buy up the cream of non-government mortgages. This could lead to higher earnings per share and dividends at such companies. Their shares would be in for a major increase if the housing market ever started to recover.
It could take a long time for the housing market to recover from the 2008 meltdown, according to BlackRock. Novick and Randy Robertson, the head of BlackRock's securitized asset investment team, told reporters that they think it could take 6.6 years for housing supply and demand to reach equilibrium again in a good economy. They also noted that it could take up to 26.4 years to recover if there was a long-term bear market.
This negativity could actually be very good news for mREITs because it could scare away banks and other finance providers from mortgages. The BlackRock analysts noted that a host of factors, including tight mortgage credit, retiring baby boomers, and regulatory uncertainty, are scaring investors away from mortgages.
That should make it much easier for mREITs to get an even bigger share of the mortgage market. It could help them become the lenders of first result and the dominant players in the business.
One company that could be well placed to reap the benefits of a lousy long-term real estate market is Chimera Investment Trust (CIM). Chimera was set up by Anally to invest in riskier loans. If the market becomes riskier, Chimera would be in a position to offer the financing no one else cans.
So, there seems to be a lot of opportunity in the world of mREITs. Warren Buffett sees it, but the Wall Street establishment doesn't. That could be very good news for mREIT investors, particularly those who are willing to take a risk on companies willing to expand in such a volatile market.