Wednesday, August 13, 2008

Profiting from the Credit Crunch/Real Estate Bust

A friend and business associate directed my attention to this article in our local paper, The Record, about a couple of entrepreneurs, Jacob Benaroya and Danielle Brooks, that started a hedge fund to invest in distressed mortgages: "Firm finds value in bad loans". The partners founded the firm, Biltmore Capital, at the peak of the real estate boom three years ago. Excerpt:

Typically, Biltmore buys loans at about 50 cents on the dollar, although mortgages on truly distressed properties - for example, in Detroit - can be picked up for as little as 10 cents on the dollar.


The eight-employee company expects to buy $100 million of mortgage debt in 2008. Benaroya said that could triple in 2009, as more subprime loans go bad. The company works in housing markets all over the nation, though the greatest concentration of bad loans is in the Rust Belt states, where the economy and job markets are troubled, and Florida, California, Arizona and Nevada, where there was a lot of overbuilding.

Although foreclosures have risen in New Jersey, they are nowhere near the rate in those distressed markets.

Ilan Kaufthal, a member of the board of Biltmore Capital, said he expects high returns in this business for the next year or two, because non-performing mortgages can be bought at such deep discounts.

"I think it's an extraordinary opportunity over the next few years for people who have the liquidity and cash to buy these mortgages," said Kaufthal, a former Bear Sterns executive who has also invested in Biltmore.

Last month, a similar article about entrepreneurs investing in distressed mortgages appeared in the OC Register, "Investor says only one road to foreclosure profit". Here's an excerpt from that article:

Robert Lee, a Huntington Beach-based investor in distressed home loans, says there is still plenty of pain ahead for the housing and mortgage markets.

Last year I shadowed Lee for a day and wrote a story about it. I had met him at a seminar and was impressed by his enthusiasm for investing in dud loans. Recently he and partner David Phelps have expanded their Web site to cover all of Southern California as well as Clark County, Nevada. Last fall, the site just covered foreclosure filings in Orange County.

I quizzed Lee about the mortgage market, his business, and his prediction for a housing rebound. I have a feeling this interview will appeal more to housing bears than bulls.

That interview is worth reading.

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