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Vulture Funds

Posted by CM on November 25, 2009


I came across this article in the NY Times on Sunday about the fate of Vulture Funds (Troubled Investments).  Here is what is going on now in Wall Street….

  1. Investors are buying discounted home loans from distressed banks.
  2. Mortgages are then refinanced through the government.
  3. Profits are made by reselling government insured loans.
  4. The newly refinanced loans are bundled into securities and sold to investors (like usual).

For those of you who like diagrams….

 graphic vulture funds2

So, evidently all of the risk for these newly refinanced loans falls on the government and then ultimately the taxpayers.  Keep in mind that “Americans are falling behind on mortgage payments in record numbers1.” 

Homeowners are involved here.  They receive a letter stating their principals have been reduced and then have to refinance to get the reduction.  The investors receive a profit when the refinances amount to more than their original $40 Million investment.   Many of the interviewees in the article expressed their concerns about this new strategy and weren’t quite clear where all of this was headed. 

From my understanding;

  • These Vulture Funds are coming from distressed banks, not necessarily from distressed loans.  Yes, the argument is that distressed banks are a victim of distressed loans, but not every single loan is in distress.
  • Principal reductions don’t seem to be targeted toward people with distressed loans or those asking for modifications.  The article didn’t make this issue clear.  It just seems that whatever loans were in the pool are the ones being refinanced.  I don’t believe investors are going around looking for homeowners to help by reducing principals.  Wall Street just doesn’t work that way.
  • This article is a clear indication that the game hasn’t changed at all.  Regulations with teeth haven’t been enacted and the rules of the game haven’t changed either.
  • All we seem to have here is either a different way to play the mortgage game or a new side game to the game that has always been played.

Come on Obama and Geithner, “Yes We Can” do something about this.

Sources:
1.  Wall Street Finds Profits by Reducing Mortgages. Louise Story. New York Times. 11/21/09.
URL: http://www.nytimes.com/2009/11/22/business/22loans.html

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