Lisa Chow is the economics reporter at WNYC. She tries to explore in her stories surprising aspects of New York’s many economies—in plain view or hidden, in neighborhoods or sectors.
Where Many See Toxic Assets, Some See Opportunity
Friday, January 09, 2009
New York, NY –
Everybody knows the story by now. Millions of bad mortgage loans started a chain reaction which brought down financial institutions all over the world. And these loans are still creating huge losses for U.S. banks. Yet, some investors are jumping at the opportunity to buy these loans. WNYC's Lisa Chow reports on entrepreneurs who are convinced they can make money buying the stuff that's killing banks' balance sheets.
REPORTER: You're about to listen in on a business pitch. I'm at a diner in New Jersey, with three guys, sitting at a corner booth.
BHATIA: We're really seeing some incredible opportunities in the residential arena.
REPORTER: That's Raj Bhatia. He's been making money in real estate since the 1990s. His business has been developing and selling high end properties in Manhattan and Connecticut. Now Bhatia is teaming up with his mortgage broker, Albert Behin, to start a new company.
BEHIN: And we got together and basically said you know there's going to be tremendous opportunities buying some of this residential debt that I basically helped create over the past 6, 7, 8 years.
REPORTER: Behin knows financing. He used to lend people money to buy their homes, and then he'd sell those loans to banks. Now, as banks are under pressure to unload this debt, he and his partner Bhatia think they can buy it at a discounted price.
BEHIN: There's opportunities to buy this debt at anywhere between 20 to 40 cents on the dollar.
REPORTER: Investors, like Behin and Bhatia, with contacts to hedge funds and banks, are trolling for bundles of these discounted mortgages. In these bundles, a home mortgage that is say $100,000 is now being sold for $20,000. And that point is not lost on Benek Oster, the other guy at the table. He made millions helping banks underwrite commercial loans in the U.S. and abroad. He cashed out at the right time, and now the partners are pitching Oster to invest in residential debt.
OSTER: Hypothetically, I've got $5 million I'd like to put in. How much you buying, how many loans are you getting for $5 million?
BEHIN: I'm going to make it very easy for you. Average loan figure $300,000 to $350,000, figure one third of the price of that is. Do the math you're under 50 loans at $5 million, a little under 50 loans.
REPORTER: That's 50 loans connected to 50 houses, where people signed a mortgage, agreed to the terms, and can no longer meet them. That means people facing foreclosure and possibly eviction. The business partners are focused on buying mortgages like these in New York, New Jersey and Connecticut.
BEHIN: We're going to be dealing with it on a loan by loan basis. Let's call these people. Let's talk to them, and say, you know what, we understand you're in a bad position. Let's take a look at what you can afford and maybe we can cut your payment down, somewhere between 30% to 50% of what you owe right now.
REPORTER: But, Behin says, that is only going to work in a quarter of the cases.
BEHIN: Unfortunately, we're in a situation where a lot of these people won't be able to even afford that.
OSTER: But this way they keep their house.
BEHIN: This way they do, but I'm not going to lie to you. A lot of people will not be able to.
BHATIA: Or may not want to.
BEHIN: Or may not want to. Even if you cut the payment from 50% of where it is, they might not be able to afford that. That's how bad of a mess we're in.
REPORTER: If Behin and Bhatia can't work out the loans with the homeowners, Behin says they'll offer the homeowners cash to leave. If that doesn't work, they'll continue down the path of foreclosure. In either of these cases, the business partners will own the house themselves, to rent it out, or sell it, depending on how the local housing market looks.
BHATIA: They will be foreclosed on whether we talk to them or not.
REPORTER: Raj Bhatia.
BHATIA: And then a phone call to the sheriff's office evicts them out of the home. That's if they don't want to leave. Being able to talk to the individual, and work things out, is a bonus in this situation.
REPORTER: But, he says, going door to door won't be easy.
BHATIA: This is not sitting at a computer screen, and hitting a few keys, and walking away, saying wow, we had a good day.
OSTER: It's not buying a bond at $5 and selling at $6.
REPORTER: Bhatia used to run a hedge fund.
BHATIA: My fellow Ivy league MBAs think I'm nuts. Cause I'm going to get dirty. I'm going to have to get dirty now. And I love that. I've been doing that for years. In 96, I bought apartments in Manhattan, I renovated them. I had crews. I do that in Connecticut. That to me connects you with the product.
REPORTER: Twenty minutes into pitch, Benek Oster, asks the money question. If he invests, what kind of returns could he expect, buying these bad loans?
OSTER: I know it's a hard question. It depends on the pool. It depends on the bargain. It depends on the deal.
BEHIN: It depends and I think there's going to be an evolution of what to expect. We have our model and everything and I could send it over to you but I think that realistically over 15% to 18%. This is not rocket science what we're doing, at the same time, it's not just a numbers game. It's really. You got to be out there. And you got to work. And you got to go and deal with every single. Every single loan is a problem.
OSTER: How much product are you seeing? I mean that's the big question. If someone gave you $100 million, is there enough product out there?
OSTER: Are you just saying that?
BHATIA: No not at all. There's $7 trillion of mortgages under water right now. We feel that over the next 6 to 8 months, that number is going to go up significantly.
REPORTER: So I ask Oster whether he's sold on the idea. He says if the partners can buy the mortgages at the right discounted price, he'd invest.
OSTER: It's my favorite type of deal. Not much risk and some upside.
REPORTER: And, he says, the plan presents opportunities in today's financial crisis.
OSTER: From a pure unemotional business perspective, this business becomes more interesting the longer the market stays bad.
REPORTER: Because, Oster says, if housing prices continue to fall, and unemployment continues to rise, there will be more mortgages in trouble, and homeowners more desperate to accept a deal. I then ask the business partners, who are used to dealing in the world of million dollar homes, whether they think this foreclosure venture is risky. Nobody knows how long the recession will last, or how low housing prices will fall. Bhatia plays down the risk.
BHATIA: If I'm buying mortgages 25-30 cents on the dollar, in a product that I understand and have worked with for the last 10-12 years. I know what I can do with that product if I own it. I feel the risk is very low.
REPORTER: And, his partner Albert Behin says, as they make money, they're also helping move these stuck mortgages through the system. Something the banks and so far the government haven't been able to do. For WNYC, I'm Lisa Chow.