No Fear for Blackstone in PHH Deal

The private equity giant is entering the beleaguered mortgage field with a $1.8 billion deal for PHH Corp.

The smart money, if no one else, appears to have the stomach to buy into the mortgage lending business right now. Private equity firm Blackstone Group is planning to buy PHH Corp.'s (PHH) mortgage unit—the latest example of a large investor seeing promise amid the recent declines of high-risk mortgage lending.

As part of the deal, GE Capital Solutions, the business-to-business leasing, financing, and asset management unit of General Electric Co. (GE), will first buy Mount Laurel (N.J.)-based PHH Corp. for around $1.8 billion, according to a Mar. 15 press release. GE will keep the company's North American fleet management services provider PHH Arval and then sell PHH Mortgage to Blackstone immediately after the deal closes, which is expected in the third quarter of 2007. PHH Mortgage provides outsourcing services such as processing loan applications; the company didn't immediately comment on its exposure to the subprime lending market.

PHH shares jumped more than 12% on news of the deal, to $31.26 in late-afternoon trading Mar. 15 on the New York Stock Exchange. Under the agreement, GE will pay $31.50 per share for PHH, a 12% premium over the stock's Mar. 14 close of $27.81.

The news hits after subprime specialists like New Century Financial, NovaStar Financial (NFI), and Accredited Home Lenders (LEND) have barraged investors in recent weeks with news of hefty losses. As the blowups mount, fears are growing that the carnage isn't over. On Mar. 13 the Mortgage Bankers Assn. reported a record percentage of mortgages entering foreclosure in the fourth quarter. That news sent the Standard & Poor's 500-stock index tumbling 2% (see, 3/15/07, "Making Sense of the Mortgage Mess"). But misery on Wall Street means cheap prices.

Wall Street firms are "opportunistic buyers now that the market has been taking hits," says Matthew Albrecht, an analyst at Standard & Poor's (S&P, like, is owned by The McGraw-Hill Cos. (MHP)). In recent days, officials at Lehman Brothers (LEH) and Bear Stearns (BSC), for example, have suggested in conference calls with analysts that they consider it a good time to acquire assets from beaten-up mortgage lenders.

To be sure, it remains anyone's guess how some lenders are prevailing in their struggle to find potential buyers. Various and sundry rumors have swirled since Fremont General Corp. (FMT) announced Mar. 2 that it's going to exit subprime real estate lending and is in talks to sell the business. H&R Block (HRB) CEO Mark A. Ernst slapped a for-sale sign on Option One Mortgage Corp. back in November, confident he could get $1.3 billion. As of mid-March, no formal bids have been announced (see, 3/15/07, "Option One's Dwindling Options").

Nonetheless some have been taking advantage of the recent turmoil to invest in other lenders at fire-sale prices. News hit Mar. 6 that a Citadel Investment Group affiliate paid around $22 million to buy some of the Brea (Calif.) subprime lender ResMAE Corp.'s assets and satisfy some of its liabilities, outbidding the investment bank Credit Suisse. ResMAE had plunged into bankruptcy in February.

Other investors are looking at buying into less pressured parts of the mortgage lending market. The New York financial-services giant Merrill Lynch (MER) announced plans on Jan. 29 to spend $1.8 billion to acquire the luxury home lender First Republic Bank (FRC), whose high net worth clients include people like the drugstore chain Duane Reade's CEO, Anthony Cuti, and Hollywood director Penny Marshall. On loans originated over the past 10 years, First Republic Bank has incurred less than one and a half basis points of cumulative net loan losses.

While the subprime market has been grabbing all the attention recently, it's definitely not the only important player in the industry. Federal Reserve Governor Susan Schmidt Bies estimated on Feb. 20 that subprime adjustable-rate mortgages, which are the heart of the problem, make up just 7% to 8% of the total home mortgage market (see, 2/15/07, "Making Sense of the Mortgage Mess").

And the PHH deal isn't the only real estate investment that Blackstone has looked at recently, either. Last month, Blackstone closed its $39 billion deal for the Chicago office building owner Equity Office Properties Trust (EOP), which included assuming debts of about $16 billion. In July, Blackstone bought the real estate investment trust CarrAmerica Realty Corp. for $5.6 billion. The company's real estate group has inked 181 separate deals since its formation in 1992, comprising around 2,450 individual real estate assets with a total enterprise value of more than $43 billion. Fortunately for its investors, Blackstone CEO Stephen Schwarzman and his team have been in the business long enough to spot buying opportunities.

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