Wednesday, March 21, 2007

Subprime Silver Lining?

Abnormal Returns says savvy investors may have their chance to capitalize on the subprime mortgage market fallout, as plans are announced by Newcastle to take down a bucket for $1.7 billion.

Pricing wasn't revealed, but Kenneth Riis, Newcastle CEO and president, said in a statement. “We have underwritten this investment to generate an attractive return on capital using conservative default and loss assumptions."

So as these lending groups go bust, who stands to gain the most? It soon won't be the big buyers, who will all soon be chasing the same pile of broken portfolios (if the past 24 months have proven anything, it's that supply of capital available for deployment in real estate assets and securities still outweighs the supply of investment opportunities), and probably underwriting too thin a default rate under pressure to deploy capital before it's "too late."

It will be whomever is engaged to transact the sales. Get in, collect your fees, get out, move on.

Remember 2005? Up and down the east coast, and throughout SoCal, it was condo conversions. Today, even the "can't miss" 95% LTV financings are being restructured (some for the second or third time), if the lender hasn't yet foreclosed.

Long term, I'll bet on the high-yield/subordinate debt funds (mezz lenders, b-note buyers, etc.) to make the most out of the opportunity. According to Commercial Real Estate Alert, CMBS mezz spreads widened by about 40 bps last week as more subprime shops went belly-up... music to the ears of RAIT, GCC and the like. Should that continue for another week or two, these groups could see returns on these types of core-strategy investments increase by up to 10%-15%, virtually overnight.

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