Buying bad loans cheaper than buying houses

|By:, SA News Editor

The foreclosure pipeline drying up, Wall Street's single-family landlords increasingly look to scooping up soured mortgages as a way to build units. Leading the way are American Homes 4 Rent (AMH), Starwood Waypoint (SWAY +0.1%), and Altisource Residential (RESI -6.5%). The shift comes as home prices - especially in the most distressed markets - rise, and as foreclosure starts drop to their lowest level since 2006.

SWAY invested $219.7M for 1,736 non-performing loans vs. $707.5M for 5,049 purchases of houses, according to a recent presentation. That works out to $127K per loan vs. $140K per house. Co-CEO Doug Brien says 30-50% of NPLs will end up as rentals for the company.

As foreclosures fall, sales of NPLs continue to ramp, led by the government and the nation's banks. $34.7B of NPLs were sold last year against just $13.1B in 2012, according to Mission Capital Advisors. Speaking on the earnings call yesterday (transcript), RESI CEO Ashish Pandey says he thinks NPL sales will hit $40B this year.

Also in on the action is Ellington Management (EFC, EARN) which says delinquent loans are trading at about 65-80% of property values.

The nation's largest landlord, Blackstone (BX +0.8%) - once purchasing as much as $100M of homes per week - has slowed the pace and its single-family unit has no plans to get into the NPL market (though another Blackstone-backed firm is heavily into it).