Saturday, February 28, 2009

Getting into those bad mortages and finding profit

I thought something like this would start happening. These two guys are buying up distressed mortgages and making money doing so:

Former hedge fund manager Raj Bhatia and mortgage broker Albert Behin are convinced they can make money buying "toxic assets" — the stuff that's killing banks' balance sheets.

Bhatia and Behin buy pools of mortgages that are "underwater," meaning the homes are worth much less than their mortgages.

"We got together and basically said, 'You know, there's going to be tremendous opportunities buying some of this residential debt that I basically helped create over the past six, seven, eight years,'" Behin says.

Apparently they drive around in a car and look at the houses on an individual basis and see what they could get the mortgage for, and how much the house is actually worth. Often, there's a big differential (because the owner of the mortgage is desperate to sell and there are so few buyers) and thus a chance to make some money.

Unfortunately, it would take an army of these guys to help get us out of the crisis. And many of the mortgages have been "securitized" and chopped up into "tranches" and turned into complex financial instruments of one kind or another. So it's unclear who to negotiate with to buy the mortgage. This stuff is going to take a long time to unwind. But I bet an army of individual mortgage buyers looking house by house is part of the solution. Maybe if these guys make a lot of money more people will do it, and the owners of the securities will figure out how to do business with them. Everyone's desperate for some kind of functioning market for this stuff to emerge.

(I think when that market does emerge, it's going to be very clear that a lot of banks are over their heads in big shitpile.)


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