Soured Mortgages Attract Institutional Dollars

A Wall Street executive who helped Goldman Sachs make more than a billion dollars betting against mortgages now wants to buy up troubled home loans.

Donald R. Mullen Jr., who was the architect of Goldman’s trade against the housing market just before the financial crisis, is seeking to raise as much as $1 billion for a new fund.

In the last two years, the investment firm he founded, Pretium Partners, has bought more than 8,000 single-family homes, which it rents out.

Now, the firm plans to use the new fund to buy distressed mortgages at a discount and rework them to permit the borrowers to remain in their homes or, if that fails, foreclose on the properties and operate them as rentals.

That shift in strategy is a sign that some institutional investors â€" private equity firms, hedge funds and firms like Pretium â€" that started buying foreclosed homes after the financial crisis are now scaling back the pace of their purchases. These firms are looking for other ways to make money from the wreckage of the housing bust and generate higher than normal returns for their wealthy investors.

The slowdown in such institutional buying reflects a rise in home prices in places like Las Vegas, Phoenix and Southern California that were hit hard by the financial crisis. It also reflects a dwindling supply of distressed homes being sold at auction in those areas by banks.

RealtyTrac, a firm that monitors housing sales and foreclosures, reports that in February, institutional investors accounted for 5.9 percent of single-family home purchases in the United States, down from 8.22 percent in January 2013, when institutional buying of homes was at its most feverish.

Earlier this year, the Blackstone Group, the private equity and investment company that has bought 44,000 foreclosed homes since 2012 â€" more than any other institutional buyer â€" sharply scaled back its purchases. Today, the company is spending from $35 million to $40 million a week to buy homes, a considerable sum, but down from the $140 million a week it was spending last summer, said a person briefed on Blackstone’s strategy.

Blackstone’s Invitation Homes subsidiary, which renovates and rents out the properties, once bought homes in more than a dozen cities but is making most of its acquisitions now in just a handful of places like Miami, Orlando and Seattle, said the person, who spoke on the condition he not be named because he was not authorized to speak publicly.

One of the places where Blackstone, Pretium Partners and others once bought homes at a rapid clip was Las Vegas, but the institutional investors have become victims of their own success in snapping up distressed homes there.

Home prices in Las Vegas have risen about 24 percent over the last year, compared with the national average of 10 percent, according to the online real estate service Trulia. The median sale price for the average home in Las Vegas now stands at $195,000, according to the Greater Las Vegas Association of Realtors. That is up from $118,000 when home prices in Las Vegas bottomed out in January 2012.

So institutional home buyers like Blackstone and Mr. Mullen’s firm, which used to be known as Fundamental REO, are becoming much more selective about where they buy homes and how fast they deploy money.

In focusing on nonperforming mortgages, Mr. Mullen, 55, who declined to be interviewed, is going back to his bread-and-butter business, which made him extremely wealthy at Goldman and before that at Bear Stearns, Salomon Brothers and Drexel Burnham Lambert.

Before leaving Goldman in February 2012, Mr. Mullen was the head of the firm’s credit and mortgage business and a member of its management committee. He oversaw the Goldman team that helped design a trading strategy that enabled the firm and its clients to bet against the mortgage market during the housing bubble. Those trades, based on the belief that banks were selling too many subprime mortgages to borrowers who lacked the financial means to withstand a sharp decline in home prices, ultimately paid off handsomely for Goldman and some of its hedge fund customers.

In a 2007 email that Mr. Mullen sent to some of his colleagues at Goldman, which surfaced during congressional hearings into the financial crisis, he said that the company stood to make “some serious money” from the housing market’s collapse. The so-called subprime trading engineered by Goldman and others on Wall Street was popularized by Michael Lewis in his 2010 book, “The Big Short.”

At Mr. Mullen’s new firm, Pretium, the Goldman connection remains strong. A 45-page marketing document shows that the Pretium fund expects to raise as much as half of its money to spend on mortgages from wealthy customers of Goldman’s asset management division. Goldman is marketing the mortgage fund to its customers just as it did for Mr. Mullen’s foreclosed-home fund.

His firm sees an opportunity in buying troubled mortgages from government-sponsored mortgage companies like Fannie Mae and Freddie Mac and the Federal Housing Administration, a division of the Department of Housing and Urban Development.

Over the last three years, the F.H.A. has sold roughly 73,000 mortgages to private investors in a series of auctions. The loans have been sold at an average price of 62 percent of the estimated market value of the homes, according to a RealtyTrac analysis.

The steep discount the federal government is selling loans for is one reason institutional investors are gravitating to buying troubled mortgages from foreclosed homes. But one distressed-mortgage buyer said the discount to the value of the home had narrowed in recent months as the housing market rebounded.

Pretium’s main strategy in buying nonperforming loans will be to find ways to revamp them, often by reducing the total amount owed, to make the mortgages more affordable to the borrower. But if that cannot be accomplished, the firm will look to foreclose and convert homes to rental properties.

The Goldman marketing document for Mr. Mullen’s fund, a copy of which was shared with Goldman’s wealthy customers, said the firm “has access to a broad loss-mitigation tool kit to repair defaulted loans and extract value.”

Jonathan Gasthalter, a spokesman for Pretium, declined to comment on the new fund.

Mr. Mullen and his 90-employee shop are moving into an already crowded field. A number of hedge funds and investment firms have been buying up distressed mortgages from United States banks looking to get troubled assets off their balance sheets.

Some of the biggest buyers of nonperforming mortgages have been firms that specialize in investing in distressed properties and troubled assets like Oaktree Capital Management and Angelo, Gordon, as well as another Blackstone subsidiary, Bayview Asset Management.

Another firm that jumped into the market for nonperforming loans is Selene Investment Partners, a firm founded by Lewis S. Ranieri, who helped give birth to the mortgage-backed securities market when he worked at Salomon Brothers in the 1980s. Selene started its first mortgage fund in 2008 at the height of the financial crisis.

The number of delinquent home loans peaked at 7.6 million at the end of 2009, according to the Mortgage Bankers Association. Today, the number of mortgages in which borrowers have fallen behind on their payments is about 4.4 million. That is a big improvement, but the 6.39 percent of homeowners today who have fallen behind on their mortgage payments remains above the average historical delinquency rate of 5 percent, according to the Mortgage Bankers Association.

“My sense is the market is less attractive than it was a year ago, but you can still find smaller-scale opportunities to make above-normal returns,” said Gyan Sinha, a partner with KLS Diversified, a $2.5 billion fixed-income hedge fund that invests in mortgage-backed securities.