What does Buffett see about real estate that others don't?

Warren 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,” Jeff Matthews, author of “Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett,” said in a phone interview. “Yes, he's been wrong about housing before. 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 U.S. have fallen on an annual basis for 20 straight months, according to RealtyTrac Inc., and home prices jumped 1.8 percent 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. Buffett's Berkshire Hathaway Inc. (BRK/A) has prepared for a turnaround by buying a brickmaker, 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. Auction Approval Ally Financial Inc. (ALLY), a Detroit-based auto lender majority owned by U.S. taxpayers, put its ResCap unit into bankruptcy last month to distance itself from the mortgage lenders' losses and help repay its 2008 bailout following the U.S. housing crash and subsequent credit crisis. U.S. Bankruptcy Court Judge Martin Glenn is scheduled to consider approving auctions for the assets at a hearing today. Berkshire said in a June 11 court filing that it's 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 has also proposed replacing Ally as the first bidder for the Minneapolis- based lender's loan portfolio. The billionaire's Omaha, Nebraska-based firm, which is a ResCap bondholder, offered to match Fortress's price of about $2.4 billion for the mortgage operations. It's also proposing fees that are about $60 million lower than Nationstar's if it's outbid. Berkshire said it's 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 in its place, or refuse to grant any company the protections, such as the breakup fee, that come with being the initial bidder. 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., a New York-based financial advisory firm. “The court will ferret out whether it is a tactic or a legitimate interest in acquiring the assets.” A buyer can't “just show up and feign interest in order to generate a better return.” Nationstar said Berkshire'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's Gordon Runte and Ally's Gina Proia declined to comment. Buffett didn't respond to a request for comment sent to an assistant. Other Bidders ResCap rejected Buffett's offer to be the initial bidder and asked the court to approve the Nationstar and Ally proposal on June 14. Should Glenn approve ResCap's plan, Berkshire still could bid in the auctions. It wouldn't have the advantages given to the stalking horse, including any breakup fee. The court will probably 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 he expects other bidders to emerge. Acquiring ResCap's mortgage business would give Berkshire contracts to service loans, a function Berkadia provides for commercial real-estate investors. It would also give Buffett another platform to originate mortgages, which his firm already does for buyers of its Clayton unit's pre-fabricated homes. Berkshire, which holds the second-highest credit rating from Standard & Poor's, can access funding cheaper than almost any company in the U.S. It sold $750 million of five-year bonds paying a 1.6 percent coupon last month. Home Lenders 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 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 force banks to raise capital. That's creating an opportunity for investors like 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?” he 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 Buffett has said 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 percent below their peak that year. “Housing will come back -- you can be sure of that,” Buffett wrote in a February letter to Berkshire shareholders. “Every day we are creating more households than housing units. 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.” Struck Deals Berkshire is the largest investor in Wells Fargo & Co. (WFC), the biggest U.S. home-loan originator, and has a preferred stake in Bank of America, the fourth-largest U.S. mortgage lender. Buffett's firm also has subsidiaries that make carpet, building insulation and roofing materials. Its subsidiary Acme Brick Co. last year bought Montgomery, Alabama-based Jenkins Brick Co. The HomeServices of America Inc. unit has struck deals to acquire real-estate brokerages in Connecticut, Oregon and the state of Washington this year on the expectation that home sales will rebound as banks liquidate seized properties after settling foreclosure-misconduct claims. The housing market is “starting to show a pulse,” HomeServices Chief Executive Officer Ron Peltier said in an April interview. Berkshire 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 said in a May 3 letter, according to the filing. Ally Rejected 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 were private. Berkshire 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. 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 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 Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Two days later, Berkshire had sold its unsecured debt, which had a face value of more than $500 million, according to court documents. Berkshire said in a court filing it holds more than $900 million in ResCap's junior secured bonds. ResCap's 9.625 percent junior secured notes, which Berkshire's General Re unit owned as of Dec. 31, added 0.3 cent to 95.3 cents on the dollar at 9:27 a.m. in New York, according to Trace. They've risen from 56.9 cents in November. --Bloomberg News--