Warren E. Buffett, whose prediction last year of a housing recovery was premature, is raising his bet on a rebound with his $3.85 billion bid for a mortgage business and loan portfolio from bankrupt Residential Capital LLC.
The offer “certainly indicates that he thinks the worst is behind us,” said Jeff Matthews, author of “Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett” (eBooks on Investing, 2012).
“Yes, he's been wrong about housing before,” Mr. Matthews said. “But if you look at any credit metric, if you look at any of the banks and what's happening in their loan portfolios, it's getting better.”
Foreclosure filings in the United States have fallen on an annual basis for 20 straight months, according to RealtyTrac Inc., and home prices jumped 1.8% in March, the biggest monthly increase in at least two decades, as record-low mortgage rates and a dwindling inventory of properties available for sale strengthened demand.
Mr. Buffett's Berkshire Hathaway Inc. (BRK/A) has prepared for a turnaround by buying a brick maker, expanding its real estate brokerage and wagering on commercial property through a company jointly owned with Leucadia National Corp. (LUK). The venture, called Berkadia Commercial Mortgage LLC, was formed from a loan-servicing and mortgage business purchased out of bankruptcy in 2009 and once owned by ResCap's parent.
Ally Financial Inc. (ALLY), an auto lender majority owned by U.S. taxpayers, put its ResCap unit into bankruptcy protection last month to distance itself from the mortgage lenders' losses and help repay the federal bailout it received in 2008 following the U.S. housing crash and subsequent credit crisis.
Berkshire Hathaway said in a June 11 court filing that it is seeking to replace Fortress Investment Group LLC (FIG)'s Nationstar Mortgage Holdings Inc. as the stalking-horse, or initial, bidder at an auction for ResCap's mortgage business. Berkshire Hathaway also has proposed replacing Ally as the first bidder for the lender's loan portfolio.
Berkshire Hathaway, which is a ResCap bondholder, offered to match Fortress' price of about $2.4 billion for the mortgage operations. It is also proposing fees that are about $60 million lower than Nationstar's if it is outbid.
Berkshire Hathaway said that it is prepared to pay $1.45 billion for the loan portfolio, compared with Ally's $1.4 billion for a sale outside the bankruptcy plan backed by the car lender.
"REAL OFFER'
The judge can either accept Nationstar as the stalking horse for the mortgage unit, name Berkshire Hathaway in its place or refuse to grant any company the protections, such as the breakup fee, that come with being the initial bidder.
Mr. Buffett has “come out with what appears to be a very real offer to buy the assets,” said John McKenna, a managing director at Miller Buckfire & Co. LLC, a financial advisory firm.
“The court will ferret out whether it is a tactic or a legitimate interest in acquiring the assets,” Mr. McKenna said.
A buyer can't “just show up and feign interest in order to generate a better return,” he said.
Nationstar said that Berkshire Hathaway's request shouldn't be granted, because it may discourage potential investors in future bankruptcies from devoting the time and money required to be a stalking horse, according to a June 14 court document.
Susan Fitzpatrick, a ResCap spokeswoman, Fortress' Gordon Runte and Ally's Gina Proia declined to comment.
Mr. Buffett didn't respond to a request for comment sent to an assistant.OTHER BIDDERS
ResCap rejected Mr. Buffett's offer to be the initial bidder and asked the court to approve the Nationstar and Ally proposal June 14.
Should U.S. Bankruptcy Court Judge Martin Glenn approve ResCap's plan, Berkshire Hathaway still could bid in the auctions. It wouldn't have the advantages given to the stalking horse, including any breakup fee.
The court probably will affirm Nationstar as the initial bidder for the mortgage assets, beginning a three-month auction process, Douglas Harter, a Credit Suisse Group AG analyst, wrote in a June 13 note after meeting with the firm's management.
He said that he expects other bidders to emerge.
Acquiring ResCap's mortgage business would give Berkshire Hathaway contracts to service loans, a function that Berkadia provides for commercial real estate investors. It also would give Mr. Buffett another platform to originate mortgages, which his firm already does for buyers of its Clayton Homes unit's prefabricated homes.
Berkshire Hathaway, which holds the second-highest credit rating from Standard & Poor's, can access funding cheaper than almost any company in the United States. It sold $750 million of five-year bonds paying a 1.6% coupon last month.
ResCap, once among the largest subprime-mortgage originators, reduced its assets to $15.7 billion in the first quarter, from more than $130 billion in 2006. The firm is the fifth-largest U.S. mortgage servicer, handling the billing and collections on about $369 billion in mortgages in the first quarter, according to Inside Mortgage Finance, a trade journal.
Some of the largest home lenders, including Bank of America Corp. (BAC), have retreated from servicing and underwriting loans as new international rules designed to avert another financial crisis have forced banks to raise capital.
That is creating an opportunity for investors such as Mr. Buffett to scoop up assets at discounted prices and benefit from the rebound in housing, said David Lykken, the managing partner of consultant Mortgage Banking Solutions.
Since the collapse of the housing market, investors have been asking, “"When's the time to catch this falling knife?'” Mr. Lykken said.
If Berkshire wins the auction for the loan portfolio, the firm may be able to increase the assets' value by modifying some of the mortgages, he said.MARKET REBOUND
Mr. Buffett has said that the real estate market will rebound because a growing number of households will need properties, while supply has dropped after builders retreated following the collapse. U.S. housing starts have plunged about two-thirds since 2006, and property prices are more than 35% below their peak that year.
“Housing will come back — you can be sure of that,” Mr. Buffett wrote in a February letter to Berkshire shareholders.
“Every day, we are creating more households than housing units,” he wrote.
“People may postpone hitching up during uncertain times, but eventually, hormones take over. And while "doubling up' may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure,” Mr. Buffett wrote.
Berkshire Hathaway is the largest investor in Wells Fargo & Co. (WFC), the biggest U.S. home loan originator, and has a preferred stake in BofA, the fourth-largest U.S. mortgage lender.
Mr. Buffett's firm also has subsidiaries that make carpet, building insulation and roofing materials.
Berkshire Hathaway attempted to buy ResCap for $1 before the bankruptcy last month, the mortgage lender said in a June 14 court document.
“Neither ResCap entering into bankruptcy nor a sale of ResCap's mortgage production platform is in the best interests of Ally, the U.S. Treasury, Berkshire and other significant stakeholders in both Ally and ResCap,” Berkshire Hathaway wrote in a May 3 letter, according to the filing.ALLY REJECTED PROPOSAL
Mr. Buffett's firm proposed taking on ResCap's potential liabilities, such as mounting litigation costs, according to three people familiar with the matter who requested anonymity because talks are private.
Berkshire Hathaway wanted to avoid a ResCap bankruptcy because it held unsecured debt, the people said.
Ally rejected the proposal after deciding that a bankruptcy filing and sale better protected the company from future liabilities, the people said.
Mr. Buffett's firm invested in ResCap's secured and unsecured bonds more than two years ago, according to a June 4 court filing in which Berkshire Hathaway called for a probe of the mortgage lender's pre-bankruptcy deals.
Prices for three of ResCap's unsecured bonds climbed after the document was filed, according to the Financial Industry Regulatory Authority Inc.'s Trace system, which reports bond prices.
Two days later, Berkshire Hathaway had sold its unsecured debt, which had a face value of more than $500 million, according to court documents.
Mr. Buffett's company said in a court filing that it holds more than $900 million in ResCap's junior secured bonds.
