Steve Feinbergis the chief executive officer and senior managing director of Cerberus Capital Management. Mr. Feinberg co-founded Cerberus in 1992. Cerberus is one of the world’s largest private investment firms with approximately $22.3 billion under management. Cerberus focuses on investing primarily in distressed corporate debt, distressed mortgage product, private equity turnarounds, loan origination and real estate. Prior to founding Cerberus, Feinberg managed separate pools of capital for Gruntal & Co. and certain other accounts from 1985 to 1992. Mr. Feinberg began his career at Drexel Burnham Lambert, where he was actively involved in trading large pools of firm capital. Feinberg is a graduate of Princeton University.
From his talk:
$500 billion underweight in equity. Even people with high FICO scores are starting to default if they are underwater. This has led to more foreclosures, and supply. However, this excess supply will be slow and painful. However, this leads to investment opportunities.
There has been substantial regulatory change in the industry. Mortgage services have been working with the government to try to make it easier for people to stay in their homes. There has been a lot of legal action in this regard.
Even with Fannie Mae, the average loan goes to people with FICO scores about 750. There have been significant changes that must be kept in mind when purchasing securities tied to real estate.
No longer must one worry about just rates and payment.
Credit has become a big factor because people cannot prepay an underwater mortgage. With all this supply, regulatory change and uncertainty this has created some mispriced securities.
The new capital requirements under Basel III will also cause some changes in terms of pricing, and value assumptions.
There are very high barriers to entry in mortgages. There must be a lot of research, and the big players like the investment banks have exited this area.
FICO score used to be very important; now it is less important. Loan size is very important nowadays. Regional differences are a factor. Fixed rates do better than option ARMs or adjustable securities.
We own a building product distributions business, and the company has lost 60% of its revenue. I think the housing market will struggle for years to come.
Amherst Securities Group Mezzanine bond represents the 49% bottom of pool of mortgages of prime jumbo mortgages. The average FICO score was 723, made by WAMU in 2007.
Fifty-three percent of the pool is clean or current; 39% are 60 days or more delinquent. There is 12.4% average prepayment. The interesting thing is that 42% of the pool has a FICO score over 700. We have been buying these securities at 40%. We think that the yield is attractive at this rate.
We think prepayment goes down to 8%, default rate goes down to 8%. Severities (39%) stay the same. We these assumptions the bonds should yield 14%. Typically bonds like these should trade from 7.5-10.5%. We are using negative assumptions, but if it were to trade at these rates it should trade at 40%. This is an example of many of the types of bonds that we own or are looking at.
There are a lot of factors changing, and we will make mistakes, but the opportunity is there.
Disclosure: None
http://www.valuewalk.com/
From his talk:
$500 billion underweight in equity. Even people with high FICO scores are starting to default if they are underwater. This has led to more foreclosures, and supply. However, this excess supply will be slow and painful. However, this leads to investment opportunities.
There has been substantial regulatory change in the industry. Mortgage services have been working with the government to try to make it easier for people to stay in their homes. There has been a lot of legal action in this regard.
Even with Fannie Mae, the average loan goes to people with FICO scores about 750. There have been significant changes that must be kept in mind when purchasing securities tied to real estate.
No longer must one worry about just rates and payment.
Credit has become a big factor because people cannot prepay an underwater mortgage. With all this supply, regulatory change and uncertainty this has created some mispriced securities.
The new capital requirements under Basel III will also cause some changes in terms of pricing, and value assumptions.
There are very high barriers to entry in mortgages. There must be a lot of research, and the big players like the investment banks have exited this area.
FICO score used to be very important; now it is less important. Loan size is very important nowadays. Regional differences are a factor. Fixed rates do better than option ARMs or adjustable securities.
We own a building product distributions business, and the company has lost 60% of its revenue. I think the housing market will struggle for years to come.
Amherst Securities Group Mezzanine bond represents the 49% bottom of pool of mortgages of prime jumbo mortgages. The average FICO score was 723, made by WAMU in 2007.
Fifty-three percent of the pool is clean or current; 39% are 60 days or more delinquent. There is 12.4% average prepayment. The interesting thing is that 42% of the pool has a FICO score over 700. We have been buying these securities at 40%. We think that the yield is attractive at this rate.
We think prepayment goes down to 8%, default rate goes down to 8%. Severities (39%) stay the same. We these assumptions the bonds should yield 14%. Typically bonds like these should trade from 7.5-10.5%. We are using negative assumptions, but if it were to trade at these rates it should trade at 40%. This is an example of many of the types of bonds that we own or are looking at.
There are a lot of factors changing, and we will make mistakes, but the opportunity is there.
Disclosure: None
http://www.valuewalk.com/
