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Fortress Gathering Capital for Mortgage-Servicing Rights

Fortress Investment Group LLC, the New York-based investment firm overseeing $46.4 billion, is seeking capital to buy residential mortgage-servicing rights as banks sell the loans, according to a presentation to clients.

The firm may invest through separate accounts as well as a commingled fund, in which commitments from clients are pooled, according to the marketing presentation, a copy of which was obtained by Bloomberg News. The rights are a contractual monthly fee paid for servicing a loan, based on the size of the balance.

Gordon Runte, a spokesman for Fortress, declined to comment.

Firms such as Fortress and West Palm Beach, Florida-based Ocwen Financial Corp. are picking up business as banks retreat from mortgage servicing because of regulatory pressure from Basel III rules that make it costlier to hold risky assets. The investments are expected to produce income without relying directly on housing market performance, according to Fortress.

“In the U.S., the regulatory drumbeat continues,” Wes Edens, head of private equity at Fortress, said during an earnings call this month. “There is going to be a flight of businesses and assets out of regulated financial institutions into nonregulated. We see that certainly in the mortgage-servicing rights.”

Fortress and its affiliates since December have used a co-investment structure to buy servicing rights for more than $70 billion of unpaid principal balance, according to the presentation, which doesn’t set a fundraising target. The more than $700 billion of unpaid balance in the available pipeline may surge to $4 trillion over the next five years, Fortress estimated.

Aurora Bank Deal

The firm’s investments in the first quarter included a deal to purchase mortgage-servicing rights from Aurora Bank FSB, a unit of defunct Lehman Brothers Holdings Inc. Fortress affiliate Newcastle Investment Corp. said in March it would acquire an interest of about 65 percent in Aurora’s “excess” rights.

Newcastle, a publicly traded real estate investment trust run by a Fortress affiliate, raised $325 million over the past 12 months to invest in mortgage-servicing rights, said Randal Nardone, Fortress’s interim chief executive officer, on the May 3 earnings call.

Fortress plans to expand its mortgage-servicing business without holding all the assets on its balance sheet. Nationstar Mortgage Holdings Inc., the affiliate it brought public in March, will service the assets and may invest in a portion of the rights, Edens said on the call. Fortress and Nationstar this month agreed to buy the residential-mortgage unit of Ally Financial Inc. for about $2.3 billion.

Fortress will charge clients a management fee of 1.5 percent and take a 10 percent cut of profits, subject to preferred return requirements, according to the materials.

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