C93M40 House for rent  House; for; rent; house; rent; people; no; people; outdoors; outside; home; bungalow; property; real; est

By Heather Perlberg and John Gittelsohn

With home prices rising, big real estate investors have discovered another source of cheap property: bad mortgages. American Homes 4 Rent (AMH), the second-largest single-family landlord after Blackstone Group (BX), Barry Sternlicht's Starwood Waypoint Residential Trust and Altisource Residential (RESI) are stepping up acquisitions of nonperforming loans (also known as NPLs) to expand their holdings of homes to operate as rental properties.

Hedge funds, private equity firms and real estate investment trusts, which have raised more than $20 billion to purchase rental homes, are buying mortgages as banks face new regulations that make it more expensive to hold soured loans. The Department of Housing and Urban Development is also auctioning loans to stem losses at the financially troubled Federal Housing Administration.

The shift to buying loans comes after the pace of foreclosures slowed and house prices jumped in Atlanta, Phoenix, and other hard-hit markets where investors have made the most purchases. Average home prices in Phoenix have risen 44 percent since hitting bottom in September 2011, according to the S&P/Case-Shiller Home Price Indices. Atlanta prices are up 37 percent since March 2012. Paying more for homes makes it harder for landlords to make money from rentals. "Our NPL acquisition strategy will continue to give us access to properties and healthy markets nationwide," Altisource Chairman William Erbey said on a Feb. 20 call with investors. The company bought 13,000 delinquent loans last year.

The large-scale loan purchases raise concern among housing advocates that residents may be displaced or transformed into renters of their former houses, according to Kevin Stein, associate director of the California Reinvestment Coalition, a San Francisco tenant and consumer advocacy group. "They should be modifying those loans to keep the homeowner in there, but it runs counter to their business model," Stein says. "They shouldn't be in the business of buying distressed loans for the purpose of foreclosing on people."

Sales of Nonperforming Mortgages Soar to $34.7 Billion

Douglas Brien, co-chief executive officer of Starwood Waypoint, says his company plans to give delinquent residents a chance to stay put as owners or renters. "Our intent is to approach some of these folks where it just doesn't look like they're going to get caught up on their loans," he says. The company can "offer them the opportunities to stay in their homes and keep their kids in the same school."

Starwood Waypoint and its predecessor companies have paid $220 million for 1,736 nonperforming loans since 2012, according to a January presentation to investors. That's about $127,000 per distressed loan, compared with $140,000 per rental home. Brien estimates 30 percent to 50 percent of the nonperforming loans will end up as rentals for the company. In other cases, the borrowers will resume paying the loans after a modification, or Starwood Waypoint will sell the homes because the location or quality doesn't match its investment criteria. "We're always going to take the outcome that's most economically beneficial," he says.

About $34.7 billion in nonperforming mortgages were sold last year, up from $13.1 billion in 2012, says William David Tobin, principal of Mission Capital, a real estate loan broker. Altisource CEO Ashish Pandey predicts that more than $40 billion may be sold this year.

Homes acquired through NPLs have often gone years without maintenance as the owners struggled to pay debts, adding to renovation costs for investors who take them over. Loans on homes subject to foreclosure filings in December were an average 920 days delinquent, up from 255 days late in January 2008, according to data provider Black Knight Financial Services. That makes them too much trouble for investors like Jon Daurio, a co-founder of Kondaur Capital, which started buying delinquent loans in 2007. "The longer the borrower is in a house that's nonperforming, the amount of deferred maintenance just grows and grows and grows," says Daurio, who left Kondaur in 2011. "For me, it's too risky."

More From Businessweek:

Increase your money and finance knowledge from home

Goal Setting

Want to succeed? Then you need goals!

View Course »

Managing your Portfolio

Keeping your portfolio and financial life fit!

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

didn't say that ---- betty_brock!
seems you can't read....
I said ... capitalism turns to greed...

March 03 2014 at 2:07 AM Report abuse +1 rate up rate down Reply
Little Savage

See, capitalism is good. Good for keeping the populace broke, hungry, and now homeless. And you cant pull yourself up by the bootstraps and make a living wage, because no one will pay one any more. Milk is up by 400% and paychecks are down by 10%. Gotta love that capitalism.

March 03 2014 at 1:51 AM Report abuse +1 rate up rate down Reply
1 reply to Little Savage's comment
Tom Wilson

The early years of capitalism marked the first time in the history of mankind that the poor had an opportunity to not only survive, but to rise above their poverty.

March 03 2014 at 9:57 AM Report abuse +1 rate up rate down Reply

Foreign capital owns most of our city's real estate now. So goes much of USA's single and multiple family homes, "savvy one".

March 02 2014 at 8:30 PM Report abuse +1 rate up rate down Reply

Nothing new here - savvy investors have been doing this since WWII.

March 02 2014 at 5:01 PM Report abuse -1 rate up rate down Reply

So now Wall Street has moved into the rental market with derivatives, securitizing it for another bubble to pop when another too big to fail fails again, and it is coming because and just because they got bailed out didn't stop their debt from growing.

At the same time the rents keep climbing, as wages stagnate and the economy is still in a stall, as the rich get richer and the middle class disappears along with small businesses that were supported by them thanks to crony capitalism and it's media supporters, like CNBC.

March 02 2014 at 4:07 PM Report abuse +4 rate up rate down Reply

This is what the real estate industry and the bankers/mortgage companies planned all along. If there was any real justice remaining in America most of them would be dancing at the end of a rope.

March 02 2014 at 3:57 PM Report abuse +6 rate up rate down Reply
1 reply to hiduby's comment

Nobody blames the deadbeats who bought houses they couldn't afford.

March 02 2014 at 9:20 PM Report abuse -2 rate up rate down Reply
1 reply to betty_brock's comment

I do; at least those who used their homes' equity like an ATM, then walked away with their toys and left the banks and taxpayers on the hook. I don't blame those who fell ill or those who through no fault of their own lost their jobs.

There's been alot of immorality on all sides. The Government failed us; opportunistic lenders pushing bad paper took us all for a ride; unscrupulous realtors, appraisers and loan officers all let their greed trump morality and collectively sold the rest of us up the river as they hyperinflated the market to line their own pockets.

The sad thing is, like cockroaches when the light comes on, the people who fed off the carcass have disappeared and left homeowners and taxpayers holding the bag.

March 03 2014 at 7:05 PM Report abuse rate up rate down

nice hey if i had big bucks i would do it to amass my holdings off the ones who got over there head

March 02 2014 at 12:26 PM Report abuse -2 rate up rate down Reply
1 reply to forkliftman53's comment

I agree. In all the foreclosure around us that I know the details on, not. Single one was because of loss of job, health etc. they were all "strategic foreclosures" It made financial sense to owners to give it back to the bank, not because they could not make the payments. Sure there are some hardship cases, but a lot less than most think.

March 02 2014 at 9:26 PM Report abuse -2 rate up rate down Reply
1 reply to vlady1000's comment

I do know of at least one that was by any sense of the word legitimate. Those who were legitimately displaced, I feel sorry for. I've heard of people walking away because it was just easier. Those people I do blame.

I also blame the underwriters, the appraisers, the mortgage brokers, the realtors. They all conspired to drive sales volume and prices up, up, up so they could line their pockets. As soon as the crash hit, most scattered, leaving homeowners underwater and taxpayers holding the bag for the collective mess. Those people, along with the risk speculators who knew better and the Government that saw the problems but didn't act to avert disaster deserve jail time. They'll never get it, but they deserve it.

March 04 2014 at 9:26 AM Report abuse rate up rate down
Tony and Laurel

Here we go. Modify the the loan so the deadbeats can stay. A deadbeat by any other name is still a deadbeat. You can't make the payment, oh pooh pooh. I don't care why. You signed and agreed.

March 02 2014 at 10:03 AM Report abuse -2 rate up rate down Reply
1 reply to Tony and Laurel's comment

That's kind of cruel. I know someone whose home was auctioned not long ago. She lost it because she contracted bone marrow cancer and is dying; it just takes a few years to kill you, as it destroys basically every major system in your body. It's an ugly disease and an agonizing death.

She *loved* her job, had a high income and would never have quit work; she still wishes she could find some way to go back to work but she can't sit upright any more because of multiple spinal fractures (her cancer tears you apart, piece by piece) and the pain they cause. She's on pain killers that have robber her of her intellect and her drive, so that she can stand living at all.

Yes, she signed a contract. What the hell is she supposed to do, sell failing, cancer-riddled organs on the black market? She has nothing of value; her disease has robbed her of her dignity, her career, her health, her ambitions and will ultimately take her life. Would you say she deserved it?

I'm like you most of the time. This caused me to stop and think: There but for the grace of God go I.

March 02 2014 at 11:18 AM Report abuse +4 rate up rate down Reply

bottom line ....
Capitalism --- is GREED !!!

March 02 2014 at 9:37 AM Report abuse +3 rate up rate down Reply
1 reply to msolare's comment

vulture capitalism is greed....I still think capitolism grows this country...Human nature spoils it's good intentions......

March 02 2014 at 10:41 AM Report abuse +8 rate up rate down Reply

This is OLD NEWS. Investors have been doing this since World War II and probably before. Next story please!!

March 02 2014 at 8:21 AM Report abuse rate up rate down Reply