Tag Archives: financial industry

Billions Poised to be Invested in Distressed Real Estate — But Small Buyers, Beware!

The New York Times reports today that major investors, fueled by domestic and foreign investment groups, wealthy individuals, endowments and pension funds, are prepared to spend billions of dollars buying distressed debt and real estate. 

These investors – often called “vultures” although the Times calls them “market opportunists” – believe that “some people have thrown the good out with the bad, and that the prices of some investments have simply fallen too far.”

For example, the Times reports that one Wall Street specialist in so-called distressed debt “recently spent at least $450 million for assets of Thornburg Mortgage, the battered mortgage servicing company. Others are buying beaten-down corporate bonds and looking at car and credit card loans.” 

“They are buying up mortgages of hard-pressed homeowners, the bank loans of cash-short businesses, and companies that seem to be hurtling toward bankruptcy,” said the Times, “And they are trying to buy them all on the cheap.”

A former executive of the Countrywide Financial Corporation, one of the mortgage giants that fostered subprime lending, recently helped start a company to buy mortgages.

In addition, the Blackstone Group “just raised $10.9 billion from investors to scoop up real estate.”

GlobeSt reports that “According to a company statement, this fund was the largest real estate opportunity fund ever raised.”

Blackstone senior managing director and New York City-based co-head of Blackstone’s real estate group, Jonathan Gray, stated that  “we believe there should be attractive investment opportunities for this capital given the market dislocation that exists today.”

We agree that the current distressed real estate market offers tremendous opportunities. 

The time is right for active, intelligent investors to take advantage of the multi-billion dollar distressed real estate market.  The real estate market is brimming with profit opportunities for those with leverage and expertise

But this is not an easy market for individual, smaller investors to penetrate.

The truth is that most smaller investors do not have the leverage and expertise to succeed in this volatile and extremely competetive market.

In fact, the effort that the smaller, part-time investor in foreclosures and distressed real estate would need to spend identifying properties, haggling with lenders and distressed owners, attending auctions and establishing financing is equivalent to a full-time job — and even then, success is far from likely.

Most smaller investors in this market will get caught up in the buying frenzy, spending too much time and money on so-called coaching and how-to courses from self-proclaimed foreclosure gurus, and then spending too much on property that will continue to fall in value and fail to provide an adequate income stream.

Great real estate deals do exist across the country. But to be successful, investors will need a high level of sophistication in identifying properties, acquiring them and developing the right exit strategy for each asset.

Smaller buyers, beware!

UPDATE:

For the lastest on the real estate vulture fund being formed by disgraced ex-Governor of New York Eliot Spitzer, click here.

The Battle Lines Have Formed in the Politics of the Credit and Mortgage Crisis

The battle lines have formed in the political fight over the federal government’s response to the credit and mortgage crisis.

There are now two clear, and clearly different, strategies being put forward as the federal government attempts to deal with the credit and mortgage crisis — or is it the real estate crisis, the housing crisis, the foreclosure crisis, the liquidity crisis, the international banking crisis, the securities crisis, or all of the above?

One strategy relies on persuasion (and the credit industry’s recognition of group self-interest) and the other on force (and the belief that without the threat of force, individual self-interest will trump group self-interest every time).

The persuasion strategy belongs to the Bush administration, including the President’s Working Group on Financial Markets, and a majority of the Republicans in the House and Senate.

Their basic approach is to use their bully pulpit, as well as some incentives, to attempt to persuade the banks, lenders, mortgage brokers, and others in the credit industry to regulate and reform themselves.

As Treasury Secretary Henry Paulson put it, the Bush administration and the President’s Working Group on Financial Markets (which includes, in addition to the Treasury Secretary, the heads of the Federal Reserve Board, the Federal Reserve Bank of New York, the Securities and Exchange Commission and the Commodity Futures Trading Commission) want “to not create a burden” on the players in the credit industry.

They’re hoping that the industry will see that their own self-interest requires them to take the actions that the administration suggests in order to restore confidence and stability in the credit market.

For the most part, the Working Group’s recommendations would not require legislation, but would be implemented by the credit industry itself.

As the New York Times testily observed, the administration’s program, announced with such fanfare today by Treasury Secretary Paulson, “amounted to little more than demands that investors and financial institutions take greater care in analyzing and managing their risks.”

On the other side of the aisle, and from a different ideological perspective, the Democrats are pushing an agenda that relies far more on the force of government imposed regulations and the concomitant threat of legal sanctions.

The Democrats’ thinking is premised on the belief that even with the credit market in crisis, and even with the general recognition within the credit industry that new rules are necessary for the good of the game, the individual players will adhere to these rules only when they are forced to do so by federal regulators with the threat of punishment.

The Democrats are probably also thinking that a “tough” approach to the banks and the brokers will play well with the voters.

What will happen — will the persuaders or the punishers win out in the end?

Our view is that in the short run — that is, until after the November elections — the persuaders will stand their ground, even in the face of election year attacks from the Democrats, and resist the increasingly insistent calls for unleashing an armed federal force against the credit industry.

If the financial crisis worsens significantly, we would then expect that the Republican persuaders will have to make more concessions regarding legislation and federal sanctions, although we would still expect that these will be minimal.

On the other hand, if the Democrats win in November, persuasion will be dead and war will be declared.  Force would be used against the financial markets and credit industry on a major scale.

We could then see a comprehensive and sweeping legislative overall of the entire credit and banking industry even more extenstive than the Securities and Exchange Act.