Lone Star Wins $3.8 Billion of Bad FHA Loans at Auction

Photographer: Michele Tantussi/Bloomberg

Lone Star Funds founder John Grayken. Close

Lone Star Funds founder John Grayken.

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Photographer: Michele Tantussi/Bloomberg

Lone Star Funds founder John Grayken.

Lone Star Funds, the private-equity firm founded by billionaire John Grayken, submitted winning bids for $3.9 billion of soured home loans sold this month by the Department of Housing and Urban Development.

It was the first time that a single bidder won each of the pools of loans offered in such a sale of debt previously insured by the Federal Housing Administration, HUD said today in an e-mailed statement. Dallas-based Lone Star’s bids on the 16 pools auctioned on June 11 averaged 77.6 percent of the estimated current prices of the homes and 65.8 percent of the unpaid loan balances, HUD said.

The offering “was the most competitive sale to date, drawing a larger number of bidders and bids per pool than previous sales,” HUD said in the statement sent by spokesman Brian Sullivan.

Jed Repko, a Lone Star spokesman at Joele Frank Wilkinson Brimmer & Katcher, declined to comment.

The firm’s offers crowded out other investors such as hedge funds and rival private-equity firms that have been seeking to buy defaulted mortgages to earn higher returns amid bond yields that central bank stimulus measures have depressed. For HUD, its auctions represent an attempt to simultaneously improve the finances of the FHA, which last year required the first taxpayer subsidy in its 80-year history, and to pursue its public mission of averting foreclosures on the underlying properties.

27 Investors

The auctions are conducted in a “sealed bidding process,” in which potential buyers aren’t identified until their offers are ranked, according to HUD’s statement. A total of 27 investors submitted 163 bids on the pools sold this month. Since 2012, average winning bids have risen from about 50 percent of property values, the department said.

Lone Star was expecting to raise about $7 billion for its Lone Star Fund IX, according to the minutes of a March meeting of the New Mexico Educational Retirement Board, which committed to a $100 million investment. Bob Jacksha, the chief investment officer of the NMERB, described Lone Star at the meeting as “one of the best, if not the best” in the business of profiting from soured home loans.

Lone Star uses mortgage servicer and lender Caliber Home Loans, which it backs, in its bad-loan investing, the minutes show. Caliber today sold $1 billion of bonds backed by soured mortgages, with most of the debt yielding 3.25 percent, according to person with knowledge of the offering, who asked not to be named without authorization to speak publicly.

Newsletter Asset-Backed Alert reported the firm won the HUD auctions earlier today.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net Mitchell Martin, Chapin Wright

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