How To Bet With Warren Buffett On A U.S. Housing Turnaround

Includes: BAC, BRK.B, CIM, LUK, WFC
by: Zvi Bar

Warren Buffett continues to bet on a housing recovery, and this time with a $3.85 billion bid for a mortgage business and loan portfolio from bankrupt Residential Capital LLC ("ResCap"), a subsidiary of Ally Financial Inc. Ally was created out of the former financing division of General Motors (NYSE:GM), is majority-owned by taxpayers and put its ResCap unit into bankruptcy last month to sever its relationship with mortgage losses.

ResCap is the fifth largest mortgage servicer within the United States, but got there largely due to the significant number of subprime mortgages it originated. ResCap's non-agency backed subprime and alternative mortgages may be comparable to some of the type held by non-agency REITs like Chimera (NYSE:CIM) and Invesco Mortgage Capital (NYSE:IVR), or ones originated by Contrywide Financial before the subprime crash.

Berkshire Hathaway (NYSE:BRK.A) owned both secured and unsecured ResCap debt, but apparently sold the unsecured debt last month. Berkshire still holds more than $900 million in junior secured ResCap bonds. Berkshire Hathaway is a ResCap bondholder and it offered to match an offer by another bondholder, Fortress, for the mortgage operations. Berkshire also added that it would be willing to pay $1.45 billion for the related loan portfolio, outside the bankruptcy plan backed by Ally. Berkshire also attempted to obtain the business before the bankruptcy filing.

Recent housing numbers have been positive. On an annual basis, U.S. foreclosure filings fell for the last 20 consecutive months. Also, home prices increased by 1.8 percent in March, which is larger than any monthly appreciation through the recent housing bubble. If you believe Warren Buffett is right, you may want to invest in a potential U.S. housing recovery along with him. Below are ways you can do it.

First and foremost, you can invest in Buffett's own company, and really invest along with him. Berkshire is available through its high prices A-shares , or its lower priced B-shares (NYSE:BRK.B). Berkshire's bond holdings and deep pockets allow it to do things like hunt for multi-billion dollar portfolios of assets for sale on the cheap in bankruptcy courts. Chances are that you cannot do that, unless though investing in a company like Berkshire or a hedge fund.

Berkshire has many housing related investments and recently acquired Jenkins Brick, merging it within its Acme Brick subsidiary. Berkshire also owns Clayton Homes, a leading producer and financer of manufactured homes, and holds other housing investments such as Shaw (carpet), Johns Manville (insulation) and MiTek (building products).

Berkshire Hathaway also has an 80 percent interest Nebraska Furniture Mart and owns over 16 percent of the common stock of USG (NYSE:USG), the maker of drywall under the sheetrock brand, as well as some convertible bonds. All of these investments would be included in Berkshire, but USG would be the only above-mentioned equity openly available to retail investors.

Buffett's Berkshire Hathaway Inc. has made several other private investments in advance of an anticipated eventual U.S. housing turnaround, including entering a joint venture with Leucadia (NYSE:LUK) called Berkadia Commercial Mortgage LLC. Berkadia is at least partially composed of assets purchased out of bankruptcy in 2009, but formerly related to GM. ResCap's mortgage business would give Berkshire loans to service through Berkadia. Since Leucadia is considerably smaller than Berkshire, and it is a 50/50 joint venture, Berkadia should be more significant to Leucadia, and this may be seen as another method of betting with Berksihre.

Beyond Berkadia and Clayton, Berkshire also has mortgage related housing exposure from being the biggest investor in Wells Fargo & Co. (NYSE:WFC), the largest U.S. home-loan originator, and holding a preferred investment with warrants in Bank of America (NYSE:BAC), the fourth-largest originator. These companies, too, would stand to significantly benefit from a housing recovery.

Disclosure: I am long BAC, CIM, USG.