Buffett’s Berkshire Wins ResCap Auction With $1.5 Billion Offer

Friday, 26 Oct 2012 10:09 AM

 

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Berkshire Hathaway Inc. won an auction for a portfolio of Residential Capital LLC’s loans with a $1.5 billion bid, adding to Warren Buffett’s bet on a housing market recovery.

The competing bidder was a group that included a unit of Credit Suisse Group AG, according to two people familiar with the matter, who declined to be identified because they weren’t authorized to speak publicly. ResCap auctioned its mortgage-servicing business to Ocwen Financial Corp. on Oct. 24 for $3 billion. Ocwen beat Nationstar Mortgage Holdings Inc. in an auction that would create at least the fifth-largest U.S. mortgage servicer.

“This is part of their optimism on the overall home market,” Meyer Shields, an analyst at Stifel Nicolaus & Co., said of the auction results in a phone interview.

Ally Financial Inc., a Detroit-based auto lender majority owned by U.S. taxpayers, allowed its New York-based ResCap unit to file for bankruptcy in May to distance itself from the mortgage lender’s losses and help repay its 2008 bailout following the U.S. housing crash and subsequent credit crisis. Ally was previously owned by General Motors Corp.

ResCap’s board approved Berkshire’s offer for the portfolio of about 47,000 whole loans as the “highest and best bid,” according to a statement. The agreement must now be approved by the bankruptcy court. A hearing is set for Nov. 19. The two auctions were expected to generate about $4 billion, ResCap said in a May 14 statement announcing its bankruptcy.

Warren Buffett

Buffett, Berkshire’s chief executive officer, didn’t immediately respond to a request for comment sent to an assistant. Ted Weschler, 51, who joined Berkshire this year to help pick stocks, has handled negotiations for Buffett’s firm in its discussions with ResCap as his role expanded at the company, according to court filings. Jack Grone, a spokesman at Credit Suisse, declined to comment.

ResCap, coupled with Ally’s much smaller business, was the fifth-largest mortgage servicer in the U.S. in the second quarter, handling the billing and collections on about $329 billion of mortgages, according to Inside Mortgage Finance, a trade journal. ResCap, once among the largest originators, reduced its assets to $15.7 billion in the first quarter from more than $130 billion in 2006.

Faulty Mortgages

Mortgage liabilities at ResCap from faulty home loans made before the housing bubble burst helped derail Ally’s initial public offering. A successful sale of the unit would allow Ally Chief Executive Officer Michael Carpenter to separate the auto lender from its money-losing unit.

Berkshire has been betting on a housing rally by buying a brickmaker and expanding a real-estate brokerage as Buffett bets the creation of new households will boost demand for property. Berkshire also owns Clayton Homes, the producer of manufactured homes, and also has units selling paint, flooring, furniture and insulation.

Buffett told Bloomberg Television’s Betty Liu in July, a month after he sought to be the lead bidder for ResCap’s loan portfolio, that the housing market was beginning to rebound, helping Berkshire’s units that make building supplies.

“If that’s true, then not only will they sell more bricks and more carpet and more paint, but the value that he can extract out of these loan portfolios should also work in his favor,” Shields said.

Loan Portfolio

In 2008, Omaha, Nebraska-based Berkshire paid $300 million for a portfolio of loans backing factory-built homes from CIT Group Inc., another lender that went into bankruptcy. The next year, Buffett invested in commercial real estate as Berkshire and Leucadia National Corp. established Berkadia Commercial Mortgage LLC, which was formed from a loan-servicing and mortgage business purchased out of bankruptcy and once owned by ResCap’s parent.

Berkshire had about $2.7 billion in mortgage-backed securities as of June 30 in a fixed-maturity portfolio valued at more than $31 billion. Buffett is also the largest stockholder in Wells Fargo & Co., the top mortgage lender in the U.S., and invested $5 billion last year in Bank of America Corp. The company had $40.7 billion in cash at the end of June, according to data compiled by Bloomberg.

Morrison & Foerster LLP is ResCap’s law firm handling the bankruptcy case. Centerview Partners LLC and FTI Consulting Inc. are the company’s financial advisers.

Berkshire’s class A shares climbed 0.1 percent to $130,582 in New York trading Thursday. The stock is up 14 percent this year.

The case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).


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