While others are running for the exits, one REIT is buying up subprime mortgages. Yesterday, Newcastle Investment Corp. (NCT), which is managed by hedge fund Fortress Investment Group, announced plans to buy a $1.7 billion portfolio consisting of approximately 7,300 subprime mortgages.
The subprime mortgage market is undergoing a credit crunch as rising interest rates and flat home prices increasingly stress the nation’s poorest borrowers. Two publicly traded subprime mortgage firms have filed for bankruptcy in recent weeks. Wall Street analysts believe that more subprime lenders could falter in coming weeks.
For Newcastle, among other investment vehicles with close connections to the hedge fund world, this shakeout is a buying opportunity.
“Constrained liquidity and the re-pricing of credit risk in the subprime mortgage market have created a unique opportunity for us to purchase a portfolio of loans at an attractive price,” said Kenneth Riis, CEO of Newcastle, in a written statement.
It’s unclear whom Newcastle is buying the loans from, however. But given the difficulties plaguing the subprime sector, buying opportunities can’t be that hard to find. One subprime lender, Accredited Home Lenders (LEND), is reportedly selling as much as $2.7 billion in subprime loans to an unnamed buyer.
Shares in San Francisco-based Accredited have tanked in recent weeks. But Accredited is also being courted by a hedge fund which yesterday morning loaned $200 million to the embattled subprime player. Farallon Capital Management made the five-year loan, which carries a steep 13% interest rate.
Hedge funds are known for establishing strong financial positions in troubled companies as a way to assume ownership stakes down the line. The funds can accomplish this by making high-interest rate loans to the company or buying loads of discounted shares in the firm.