The U.S. Housing Recovery Fund, which is expected to finish its first round of capital raising and open April 1, will focus on senior-ranked securities without government backing, many of which now carry junk credit grades, according to a marketing document obtained by Bloomberg News.
“Stabilization in U.S. housing fundamentals is creating an attractive investment opportunity,” the New York-based bank said in the document dated this month. “Many of the ingredients are in place for continued improvement in housing,” including near-record affordability, a better supply-and-demand balance and policy makers’ renewed focus on bolstering real estate.
Goldman Sachs Asset Management is joining hedge-fund managers Kyle Bass and Metacapital Management LP in seeking cash for new mortgage funds. They’re following firms including Cerberus Capital Management LP, CQS U.K. LLP and Canyon Partners LLC that started similar investment pools after prices slumped last year. Values in the $1.1 trillion market for so-called non- agency mortgage securities are soaring this year after Europe’s sovereign-debt crisis eased and the Federal Reserve was able to sell $19.2 billion of the notes, underscoring demand.
Property Slump
Home-loan debt that isn’t backed by government-supported Fannie Mae and Freddie Mac or U.S. agencies includes so-called option adjustable-rate mortgages and Alt-A ARMs issued during the housing boom that peaked in 2006. The securities later sunk in value amid a property slump and record defaults.
Typical prices for the most senior bonds tied to option ARMs rose to 57 cents on the dollar last week from 49 cents in late November, a 16 percent gain, according to Barclays Plc data. Bonds backed by Alt-A ARMs (BBMDA60P) increased 8 percent to 52 cents on the dollar, from 48 cents in December.
Those securities remain below their 2011 highs of 65 cents and 68 cents, respectively, after falling as low as 33 cents and 35 cents in 2009. Option ARMs allow borrowers to pay less initially than the interest they owe by increasing their balances, while Alt-A loans often went to borrowers who didn’t document income.
Some firms have pared their bets in non-agency securities after this year’s gains. Western Asset Management Co., which oversees about $443 billion and started 2012 among the most bullish on the debt, sold some investments after “an intense rally,” said Paul Jablansky, co-head of the Pasadena, California-based firm’s mortgage group. The Legg Mason Inc. unit is replacing the debt with notes such as high-yield company bonds, though it remains “long-term attractive,” he said.
Expected Yields
Senior non-agency bonds may yield 12 percent for some option ARM debt to 4.5 percent for certain securities backed by larger ”jumbo” mortgages, under a “base scenario,” according to a Bank of America Corp. report. The option ARM notes could pay 14.5 percent if losses per defaulted loan are 20 percent lower than projected, or 9.2 percent if 20 percent higher, according to the lender’s calculations.
Andrea Raphael, a spokeswoman for Goldman Sachs, declined to comment.
The new fund, which won’t use derivatives or leverage, will be structured as a limited partnership with minimum investments of $500,000, a lifespan of three years and a 0.95 percent management fee, according to the document.
Cerberus, Hayman Funds
Cerberus, the New York-based private-equity firm, last year raised $800 million for an RMBS Opportunities Fund that began in August, according to a person familiar with the matter. Bass of Dallas-based Hayman Capital Management LP, who made $500 million betting against subprime debt in the crash, is also seeking money for a new fund, according to two people with knowledge of the plan, who asked not to be identified because the information is private.
Other firms that have recently started funds include Canyon Partners, the Los Angeles-based investment firm overseeing $18.5 billion, and the $11.2 billion money-management firm CQS U.K., run by Michael Hintze in London. Its CQS ABS Alpha Fund, managed by Alistair Lumsden, started last month with $140 million, according to a Feb. 2 letter sent to clients. New York-based Metacapital, led by Deepak Narula, is seeking money for its Metacapital Mortgage Value Fund, which will begin trading in May, according to a person with knowledge of the matter.
Fixed-income managers such as Pacific Investment Management Co.’s Bill Gross and Jeffrey Gundlach, who was at TCW Group Inc. before forming DoubleLine Capital LP in 2009, started funds to take advantage of the collapse in mortgage bonds as the rout that roiled global markets began about five years ago.
Housing Affordability
The Goldman Sachs marketing document cited increasing homebuilder confidence and housing sales to show the market is stabilizing.
The National Association of Home Builders/Wells Fargo sentiment index of builder confidence in March held at the highest level since June 2007. Sales of previously owned homes in February were near an almost two-year high.
A measure of housing affordability has risen to a record after the Federal Reserve helped drive borrowing costs to all- time lows by holding short-term interest rates near zero. At the same time, home prices have declined 34 percent from the peak in 2006 to the lowest level in almost a decade.
A National Association of Realtors affordability gauge climbed in January to a record 206.1 from 101 in July 2006. A value of 100 means that a family with the national median income has enough to qualify for a median-priced property.
Volatility Risks
Risks for the fund include volatility if the sovereign-debt crisis worsens as well as illiquidity and uncertainty around future government housing policy, according to the document.
There are also obstacles to a housing recovery, including an “overhang” of homes tied to defaulted loans and owners waiting for better demand that will increase the supply for sale, according to Michael Materasso of Franklin Templeton Investments, which oversees about $325 billion of bonds.
Other challenges include the need for an improved job market and for consumers to repair their “balance sheets” and credit scores, he said.
“It isn’t going to turn around anytime soon in a major way,” Materasso, co-chairman of the fixed-income policy committee at the firm, said yesterday in an interview at Bloomberg News headquarters in New York.
SEC Settlement
Goldman Sachs, which used bets against mortgage securities to lessen losses during the financial crisis, has drawn scrutiny for its sales of the debt and related derivatives. The firm, the fifth-biggest U.S. bank by assets, denies wrongdoing.
The company paid $550 million in 2010 to settle a fraud lawsuit filed by the Securities and Exchange Commission, which accused it of misleading investors who bought a collateralized debt obligation backed by bets on mortgage bonds in 2007. It was the largest SEC settlement ever paid by a Wall Street firm.
The U.S. Senate’s Permanent Subcommittee on Investigations issued a bipartisan report last year that accused Goldman Sachs of misleading investors into buying mortgage securities that the firm’s own traders were betting against. The Department of Justice said it would investigate the findings. Last month, the firm disclosed it may face further enforcement actions from the SEC related to sales of mortgage-backed securities.
Goldman Sachs was among banks selected by the Fed to bid on mortgage bonds acquired in the bailout of American International Group Inc., drawing complaints from others on Wall Street who were shut out of the process. Goldman Sachs bought $6.2 billion of the bonds in a Feb. 8 auction. Unlike Credit Suisse Group AG, which won a Jan. 19 auction, the firm failed to immediately flip most of the securities to clients bidding through it, regulatory data on trading volumes showed.
To contact the reporters on this story: Alexis Leondis in New York aleondis@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net
To contact the editors responsible for this story: Christian Baumgaertel atcbaumgaertel@bloomberg.net; Rob Urban at robprag@bloomberg.net
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