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Housing's Bottom Feeders

Written By Brian Hicks

Posted May 16, 2008





In every single crisis, the seeds of opportunity are born. The collapse of the housing market is no different.

Case in point: Check out this story. It is about how one entrepreneur has turned bad loans into a thriving business.

From Bloomberg by Bob Ivry entitled: Recovery From Worst Housing Slump Since 1930s Comes With Angel

“The way out of the worst U.S. housing slump since the 1930s goes through Angel Gutierrez.

Gutierrez buys bad mortgages a dozen at a time for a fraction of their face value from lenders overwhelmed by the highest number of defaults in 23 years. When he goes door to door to negotiate lower payments for homeowners or pay them to move so he can sell the house, he’s speeding up the recovery by establishing a price for the homes and flushing out the least reliable borrowers.

“You buy the mortgage for pennies on the dollar, carry the big stick, tell the homeowner how it’s going to be, then double your money very easily,” Gutierrez said.

Gutierrez and his wife Brenda, based in San Diego, are a two- person shop in an industry that is attracting deep-pocketed investors such as BlackRock Inc., which manages $1.36 trillion in assets. While Gutierrez said he can buy up to $300,000 of bad loans with his own money and has funding sources for about $1 million, New York-based BlackRock plans to raise $2 billion to invest in discount mortgages.

“At this stage of the game they’re playing a very small role, but I expect that that role will accelerate as more people are willing to accept reality,” said Sam Zell, the billionaire real estate investor who’s called “the grave dancer” for buying distressed assets. “The single-family market has to be cleared. No market works unless it clears. If banks can’t clear, they can’t make new loans. Anything you do to keep people who can’t afford it in their houses is another way of delaying the market clearing.

“I’m considered a bottom feeder,” Gutierrez said. “That’s the way bankers see me. They only want the best loans, the loans that are paying. That’s nice, but there’s no money in it.”

Gutierrez has no shortage of defaulting borrowers close to home. One in every 74 homes, or 15,315, in the San Diego area was in the foreclosure process in the first three months of 2008, compared with one in every 194 homes nationally, according to RealtyTrac Inc. Foreclosure filings in the San Diego area rose 252 percent in the first quarter from a year earlier, compared with a 112 percent increase in the U.S., the Irvine, California-based real estate data provider said.

A nonperforming loan that went for 70 cents on the dollar two years ago will generally go for about 50 cents today, and 60 cents if payments are still being made, said Jeffrey Kirsch, chief executive officer of Miami-based American Residential Equities LLC, which trades and services mortgages.

Prices will “jump dramatically when bigger players get in and start buying nonperforming loans,” Kirsch said.

BlackRock, the biggest publicly traded U.S. asset manager, announced in March it was backing a new company called Private National Mortgage Acceptance Co. LLC, also known as PennyMac, that will buy mortgages at a discount and renegotiate borrowing terms with homeowners. The Calabasas, California-based company will then service the loans, meaning it will collect monthly payments.”


The vultures are circling.