Tuesday, October 30, 2007

The Purpose of the VULTURE in the Housing Market

This is a great article from CNN.Money about the vulture in the mortgage securities market. Please realize that the same thing is happening in the housing market. If one is interested in buying a house today the bidding should start at 50 cents on the dollar and if the seller is not willing to at least counter, then the buyer should move on to the next house. It is a "New Market", the old rules do not apply. Text in bold is my emphasis.

Since the subprime crisis erupted earlier this year, vulture investors looking for bargains have been circling battered securities backed by mortgages.

While opportunistic investors may be reviled by some, their presence is often an indication that a beaten down market has reached a bottom. The longer they stay away, the more likely it is that turmoil will roil the market.

"[Distressed debt investors] are a good thing for the market - they're a new force for providing liquidity," said Mark Adelson, an independent mortgage securities analyst.

For sure, vulture investors are getting ready to strike. Fundraising in the first nine months of the year hit a record $6.6 billion, according to London-based Private Equity Intelligence.

The research firm doesn't break down how much of that total is directed at risky mortgage-related debt, but several high-profile investors are eyeing the sector. The market chattered last month about a new $2 billion fund by Pacific Investment Management Co. Distressed debt investor TCW Group and hedge-fund firm Marathon Asset Management also have been said to be making moves in the sector.

The mortgage meltdown has sent many investors fleeing from risky mortgage bets like subprime-backed securities and collateralized debt obligations, which are pools of bonds sold off in slices of varying credit risk. It has also brought out vulture investors who, as their name suggests, smell an opportunity.

These investors face the difficult task of determining when prices for the distressed securities have hit a bottom. Until they're sure they're getting a bargain, they're likely to hold back on investing their money.

"It's not that no one's going to want to touch [subprime securities]. The question is at what price," said Adelson, who used to head structured finance research at Nomura Securities.

But the securities are hard to value, and no one knows if things are going to get worse. Merrill Lynch said last week that it took a $7.9 billion loss on mortgage-related assets in the third quarter. That was about $3.4 billion higher than the writedown the bank had projected a little more than two weeks earlier.

Furthermore, a recently created "superfund" designed to buy bonds and other debt backed by home loans could deter distressed investors from entering the market.

Some critics, including former Federal Reserve chairman Alan Greenspan, have warned that the fund could do more harm than good by propping up prices.

"If you intervene in the system, the vultures stay away," Greenspan said in a recent interview with Emerging Markets Magazine. "The vultures sometimes are very useful."

That some players are starting to sniff around the mortgage sector is a good sign that the market may be starting to stabilize.

Still, the murky economic outlook has left some experts anticipating a further drop off in prices of mortgage-backed securities. And there are signs the housing woes could get worse. For example, analysts are bracing for a massive wave of mortgages to reset to higher interest rates and trigger another wave of delinquencies.

The uncertainty leaves distressed debt investors with the tricky task of "catching a falling knife," said Daniel Alpert, a partner at New York-based boutique investment bank Westwood Capital, which specializes in mortgage and related securities.

"You could argue this is a good time to go in," Alpert said. "But my view is that a good portion of the market thinks the knife hasn't even started to plummet yet."

This last comment are my sentiments about the market. If you have money now is a good time to stand around on the sidelines with your hands in your pockets

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