Despite having erred in his over-confident prediction last year that the U.S. housing market would recover, Warren Buffett raised the stakes recently with a $3.85 billion bid for a mortgage business and loan portfolio from the bankrupt Residential Capital LLC.
Berkshire Hathaway was named the leading bidder, or “stalking horse," for ResCap’s loan portfolio, offering $1.44 billion on Tuesday in a bankruptcy court auction. It lost out, however, to Nationstar Mortgage Holdings' offer of $2.4 billion for the ResCap mortgage-serving assets.
Judge Martin Glenn of the U.S. Bankruptcy Court in Manhattan said:
“It's certainly the court's hope that the bidders who have been involved in the selection of a stalking horse will remain active bidders in an auction.”
A “stalking horse,” the first bidder in an auction, is entitled to a breakup fee from the winning bidder if a higher offer appears. In this case, Nationstar would get $24 million if it loses the mortgage assets, while Berkshire Hathaway would receive $10 million if a higher offer for the loan portfolio presents itself.
Berkshire has prominently featured in the company’s bankruptcy case, holding ResCap bonds in excess of $900 million. The tension between Nationstar and Berkshire resulted in a minor bidding war over ResCap's major mortgage unit.
In the first quarter of 2012, ResCap reduced its assets to $15.7 billion. This is a long way from its days as a leading subprime mortgage originator, with $130 billion in assets in 2006. If Berkshire wins the auction for the loan portfolio, it may be able to adjust some of the mortgages and thus push up the value of ResCap’s assets.
Buffett has repeatedly anticipated a recovery in the real-estate market. While supply is down thanks to fleeing builders after the market’s collapse, an increasing number of households will need to seek out property.
In a February letter to Berkshire shareholders, Buffett wrote:
“Housing will come back -- you can be sure of that. 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.”
His most recent bid is a testament to his faith in that statement.