Bruce Rose, founder of hedge fund Carrington Capital Management LLC, and a pioneer in the roller-coaster market for mortgage credit, is set for the next phase of the housing crisis: recovery.
Carrington is planning several new funds, at least one of which will step into local real estate markets expected to recover first, Rose said in a rare media interview at his office in Greenwich, Connecticut.
Another fund has already seen success with properties in Texas and Colorado, he said during the interview last week.
Rose is also rejecting lower estimated prices for his portfolio of homes that has grown through foreclosures, noting that fire sales by banks are exaggerating the market downturn. He is selling his properties one by one -- and making much more money than rivals in the same position.
We began to sense a bottoming of the market with the new (U.S.) administration, and began to focus on areas that we believe will recover early, he said.
The U.S. housing market is entering its third year of downturn that has triggered huge losses as homes are foreclosed and investors shun mortgages. The recession is adding to the fallout, and home prices are still sliding despite White House efforts to save 9 million homeowners with cheaper mortgages.
The pronouncement is a rare insight from Rose, 51, who left a life as aircraft mechanic and charter flight operator in 1980 to enter finance and sell ultra-safe mortgage bonds issued by Ginnie Mae, the agency that pools government-backed loans.
In 1990, Rose helped engineer the first bona fide sale of mortgage credit risk at brokerage Paine Webber. Later at Salomon Brothers, he financed the early subprime lenders.
Since starting Carrington in 2003, Rose packaged $23 billion in subprime mortgages. Many of the bonds included loans originated by now-bankrupt New Century Financial, whose unit for collecting and distributing payments Rose later acquired.
Carrington kept between 6 percent and 12 percent of the riskiest parts of the securitizations, and forged unique contracts that let it direct any foreclosure and liquidations of the underlying loans.
Securitizations are now under fire from Congress, blamed for triggering the crisis by raising the money that encouraged lenders to loosen underwritings to boost volume. Their failings are a key focus of planned U.S. regulatory reforms, which Rose favors, to realign lender and investor interests.
Among the proposals, lenders are to take at least a 5 percent stake in what they sell, to ensure skin-in-the-game.
That's what we do -- skin-in-the-game -- and I think that's what makes us different from any other mortgage investor out there, he said.
To protect that skin, Rose is counting on his servicer, which like others, has taken the spotlight in the housing slump since its decisions can limit or increase losses to investors.
Carrington Mortgage Services has stubbornly held on to foreclosed homes through the crisis, insisting that bulk sales were hurting bonds supported by the properties. This strategy has ignited criticism from bondholders who claim Carrington is delaying sales of bank-owned properties and modifying loans recklessly to get delinquent homeowners up-to-date.
This, critics say, prolongs payments to Rose's sub-investment grade securities at the expense of the senior investors who might be made whole sooner if a home is sold. Rose says Carrington is looking out for all bondholders, as required by bond pooling and servicing agreements.
The strategy is as long as possible, to keep the borrower in the house, and keep cash flowing to maximize the proceeds of the trust. That's always been our focus, Rose said.
When a home must be sold, Carrington does it house-by-house to get top dollar, he said.
Carrington found that as home price indexes fell, the more its selling prices outperformed the broker price opinions (BPOs) which are used by home value appraisers.
The retail market is about 15 percent higher than where banks are dumping hordes of unwanted inventory, which is driving home price indexes lower, he said.
Last week Carrington closed a sale in Littleton, Colorado, at $277,100, 13 percent above two BPOs obtained in April. A home in Freeport, Texas, sold June 11 for $180,250, higher than two March BPOs of $169,432 and $130,900.
In harder-hit Florida, Carrington sold a Cape Coral house for $116,000 compared with BPOs in the mid-$90,000 range.
We try to be the best sale on the block, not the first sale on the block, Rose said.
Rose is now eyeing East Coast and West Coast property that should perform better as markets turn. He expects rust-belt states and those dependent on the struggling auto industry will lag.
As (distressed opportunities) diminish, we'll start with the origination strategy again, he said.