Out of chaos comes opportunity

20Mar07

The subprime mortgage market is certainly in turmoil, and one could even go as far as saying it is in chaos. The question is there an opportunity to be found amongst the rubble?

E. Scott Reckard in the Los Angeles Times details the developments in the subprime market including mass layoffs and one company being moved to remove their name from a sports stadium.

One question is whether any of this is all that surprising? Dave Altig at macroblog notes how nearly every one was expecting a slowdown in housing, and in especially in that part of the market specifically affected by subprime lending. That doesn’t mean it won’t get worse or spillover into the general economy, but the results to-date should not be all that shocking to any one paying attention.

Felix Salmon highlights a study that shows the fallout from adjustable rate mortgages may not be as bad as some doomsayers believe. Indeed there are some signs today that some big time investors are dipping their toe into the subprime mortgage market, albeit in a ‘vulture investor’ sort of way.

DealBook notes that Newcastle Investment (NCT) an affiliate of Fortress Investment Group (FIG) is purchasing, presumably at a sizable haircut, a portfolio of subprime mortgages. DealBook notes that this is another example of Wall Street firms getting engaged in the subprime market, post-plunge.

Kevin Kingsbury at the WSJ.com reports that Farallon Capital Management has made a loan to Accredited Home Lenders (LEND) to boost the mortgage lender’s liquidity. Also check out an item by Bradley Keoun at Bloomberg.com also on the Farallon/Accredited deal.

In a related item, DealBook notes that SAC Capital has taken a sizable stake in WCI Communities (WCI) a Florida-based homebuilder. Not sure what to make of this, but it is interesting.

We have to admit that we pilfered this post title from this FT Alphaville item that notes:

Private equity funds generate their best returns when there is turmoil in the capital markets, the received wisdom goes.

We are subsuming hedge funds along with private equity in this general discussion. While these data points indicating the so-called “smart money” getting involved in the mortgage markets may not indicate a true bottom, it is certainly worthy of note.

A couple of cautionary words. One, is that we have no idea how the subprime mortgage story will play out. It could be the case that these investments were made too soon, the weakness accelerates, and these deals turn out be losers for these firms. Second, multi-billion dollar hedge funds are able to negotiate deals on terms that individual investors cannot. These terms may make these transactions profitable, despite the potential for further mortgage market weakness.

Those points aside, it should not deter you from keeping an eye on how the “smart money” approaches further developments in the subprime mortgage market.

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