Several private equity firms have lined up to invest in mortgage providers and servicers in recent weeks, suggesting more firms are eager to get back into a much maligned sector as it staggers out of the Great Recession,Buyouts reports in its March 26 edition.
In less than a week, between March 9 and March 14, Wilbur Ross’s WL Ross & Co. partnered with Ranieri Real Estate Partners to buy Deutsche Bank’s Berkshire Mortgage, the second-largest originator of Fannie Mae loans and a servicer of a $29 billion portfolio of “multi-family” loans, or loans to apartment building owners. The firms have re-named the company Berkeley Point Capital.
Long Ridge Equity Partners, a new New York-based firm focused on the financial services industry, invested $25 million in Indianapolis-based mortgage originator and servicing company Stonegate Mortgage Corp. Fortress Investment Group entered exclusive talks to buy mortgage lender Residential Capital from Ally Financial, while Cerberus Capital Management and Centerbridge Partners are reportedly leading a competing consortium for the mortgage unit of Ally Financial, the former lending arm of General Motors that is 73.8 percent owned by the U.S. government, sister news service Reuters reported.
Other firms looking for deals in the sector include GI Partners and Oaktree Capital Management.
The heightened interest comes as banks re-assess their mortgage servicing businesses in response to impending regulations and probes into foreclosure processes. With $10 trillion in mortgages outstanding, the market presents an enticing opportunity for private equity firms amid a slow economic recovery and a relatively tepid deal environment.
Several factors are driving the heightened interest from LBO shops. WL Ross’s thesis in backing Berkeley Point is that the market for apartment rentals will continue to do better than the market for single-family homes. The home ownership rate, or the percentage of all housing units that are owned, dropped to 66 percent in 2011 and has been steadily falling since its near-term high of 69.2 percent in 2004, according to the U.S. Census Bureau.
“We think there’s a growing demand for rental properties,” said Jim Lockhart, vice chairman of WL Ross and the former chairman of the Federal Housing Finance Agency, an independent federal agency tasked with making sure Fannie Mae, Freddie Mac and Federal Home Loan Banks are supporting a stable and liquid mortgage market. Lockhart added that the firm expects more European banks like Deutsche will be selling off similar assets to pay down debt.
Waypoint Real Estate Group, an Oakland-based real estate investment firm in which GI Partners invested in January, is pursuing a different twist on the same trend: The firm buys foreclosed homes with cash and turns them into rentals; the GI Partners investment will enable it to buy more than $250 million in single family homes. Waypoint Real Estate Group executives believe they could earn at least 20 percent from appreciation when they eventually sell the houses, firm co-founder Colin Wiel told Bloomberg.
With its investment in Stonegate Mortgage, Long Ridge Equity is pursuing a different tact. The company originates and services single family prime-conforming loans. It originated about $1 billion of mortgages in 2011 and expects to originate more than $2 billion in 2012; it also owns about $1.5 billion of servicing rights.
Long Ridge Equity sees good returns to be had buying servicing rights because of the low interest rates and quality credit of new loans. Also, several large banks are re-assessing their involvement in the sector following heightened scrutiny of mortgage servicing rights under the Basel III regulatory standards, massive write downs following the housing downturn, and headline risk posed by federal and state probes into foreclosure processes, Kevin Bhatt, a partner with the firm, told Buyouts. Banks have traditionally been able to apply 100 percent of the value of their mortgage servicing rights to their Tier 1 capital ratios. But Basel III regulations, set to be activated in stages between 2013 and 2018, will limit mortgage servicing rights to 10 percent of a bank’s common equity when it calculates its Tier 1 capital.
“In the last 10 years, servicing was consolidated by the largest four or five banks,” Bhatt said. “In light of the housing crisis and regulatory changes, many are re-trenching from that market.”