(Bloomberg) — If you have a modified mortgage made around the time of the U.S. housing markets peak, Cerberus Capital Management probably wants to buy it.
The investment firm has acquired residential loans with an unpaid balance of more than $5.7 billion as of the end of July, according to a marketing document obtained by Bloomberg.Most were mortgages issued from 2005 to 2007 and then modified. The company is seeking to increase the purchases, which are tied to homeowners who are less likely to default because theyve been making regular payments for several years.
John Dillard, a spokesman for Cerberus, declined to comment on the loan strategy.
The New York-based firm, with $29 billion under management, has become one of the largest buyers of modified home loans. Banks have been selling blighted mortgages en masse, largely because of financial regulations that require them to increase capital as a buffer for riskier assets. By honing in on loans to borrowers who have resumed payments, Cerberus is sidestepping many private equity firms and hedge funds that have increased buying of delinquent debt in recent years.
Modified loans are less likely to default or go through foreclosure than nonperforming mortgages, said Jade Rahmani, an analyst with Keefe Bruyette & Woods Inc. That makes them attractive as an investment, and also more expensive.
Since these are reperforming, theres current income being generated and youd expect them to trade for higher prices than nonperforming loans, Rahmani said.
$100 Billion
Cerberus is seeing more opportunity in buying actual loans than mortgage bonds, a shrinking and more competitive market. Theres a potential pipeline of more than $100 billion of home loans to purchase in the next two years, according to the companys marketing information. Total sales of nonperforming and modified loans in the last year were $47 billion, the document showed.
Bayview Asset Management and Angelo Gordon & Co. are also big buyers of modified loans. Banks such as Citigroup Inc. and Bank of America Corp. have been some of the largest sellers.
By targeting mortgages made between 2005 and 2007, Cerberus is betting on borrowers with a longer track record of regular payments. Some of these homeowners have never even defaulted, but banks preventively modified their loans in anticipation of missed payments due to rates resetting and monthly statements soaring.
The strategy differs from investment firms such as John Graykens Lone Star Funds and Houston-based Selene Finance, which are among the biggest buyers of delinquent mortgages.
