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MarketWatch: Wealthy Investors Bet on 'Sane Subprime' Mortgages

By    |   Monday, 16 December 2013 07:30 AM

Banks may avoid risky borrowers, but for a growing number of wealthy investors, investing in "sane subprime" and "smart subprime" mortgages are the way to go, MarketWatch reports.

Before the financial crisis, banks were originating massive numbers of risky mortgages and selling them to investors. The practice is widely blamed for creating a global financial meltdown, and banks have largely avoided the loans ever since.

Seeing opportunity in the void, companies such as private equity firms, hedge funds and alternative asset funds are developing their own "sane" subprime mortgage markets.

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Critics say these firms are creating systemic risk amid a fragile recovery. The companies dismiss these concerns, claiming they have smart subprime lending strategies.

In many cases, the companies raise funds from investors. Mortgage brokers refer applicants, and if they meet the companies' criteria and are approved, the companies use investors' cash to fund the mortgages.

Some firms are further removed from the process, MarketWatch explains.

Investment advisory firm Certis Capital Management's strategy is to give clients' cash to private fund managers, who then choose which mortgage applicants they work with.

Whatever their individual strategy, the firms say their lending practices are not risky.

Borrowers often have low credit scores — lower than 550 in some cases — but the firms claim they thoroughly investigate each borrower's personal circumstances. And approved borrowers must have large down payments, typically at least 30 percent, according to MarketWatch.

That way, if a borrower stops paying, investors who funded the mortgage are not likely to incur losses when the home is resold.

For wealthy investors looking for yield, the prospect of returns ranging from 7 percent to 12 percent annually are attractive, MarketWatch notes.

One investor said he has $4 million invested between several mortgage funds and loans arranged with mortgage brokers. He claims he's netting a 9 percent yield overall.

"We don't have anything to buy that's generating this income," he tells MarketWatch.

Big returns are possible because this new breed of smart subprime mortgages doesn't come cheap. Interest rates range from 8 percent to 12 percent. But given the tight credit markets, many people don't see any other option if they want to own a home.

Daniel Perl, CEO of Citadel Servicing Corp, says subprime mortgage holders "come from all walks of life — doctors and lawyers as well as blue-collar workers."

"As long as they have the ability to pay and equity in their homes, they are a candidate for one of our loans," he tells the Los Angeles Times.

After raising $200 million from private investors earlier this year, Perl notes, "We're looking to build it up over the next 24 months to $30 million to $50 million a month."

"It's a decent business plan in a credit-barren world," he adds.

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Banks may avoid risky borrowers, but for a growing number of wealthy investors, investing in "sane subprime" and "smart subprime" mortgages are the way to go, MarketWatch reports.
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2013-30-16
Monday, 16 December 2013 07:30 AM
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