Cerberus Acquires $5.7 Billion of Mortgages Shunned by Banks

  • Investment firm buys U.S. performing loans made from 2005-2007
  • Focus is on modified mortgages with long record of payments

If you have a modified mortgage made around the time of the U.S. housing market’s 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 they’ve 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, there’s current income being generated and you’d 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. There’s a potential pipeline of more than $100 billion of home loans to purchase in the next two years, according to the company’s 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 Grayken’s Lone Star Funds and Houston-based Selene Finance, which are among the biggest buyers of delinquent mortgages.

‘Robust Process’

Cerberus has been bundling the loans into bonds, most of which aren’t backed by the government, and selling them to investors through the debt market. The firm has done $2.2 billion in four securitization deals. In the two most recent transactions, some borrowers had been making regular monthly payments without any missteps for as long as seven years, according to Fitch Ratings analysts Suzanne Mistretta and Rachel Noonan, who evaluated the deals.

Fitch conducted a review of Cerberus last year. The company “was considered to have a robust process in place for acquiring” reperforming loans, Mistretta and Noonan wrote in a report last month.

“Particular areas of strength include its company and management experience and comprehensive due-diligence process for loan purchases,” the analysts said.

Cerberus, founded by former Drexel Burnham Lambert trader Stephen Feinberg in 1992, had success buying distressed mortgage bonds that sunk in value after the housing crash. The firm has also invested in the rental-home industry and was one of the first Wall Street companies to lend to smaller landlords with limited financing options, an area that’s since attracted firms including Blackstone Group LP and BlackRock Inc.

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