Friday, February 12, 2010 0 comments ++[ CLICK TO COMMENT ]++

Lennar enters the real estate asset management game

An obscure story but I thought it may be monumental. Lennar, a prominent homebuilder in America, has cut a deal with the FDIC to buy back some distressed loans. MarketWatch reports:

Lennar has positioned itself to benefit further from a real estate recovery through a distressed-land transaction with the FDIC to purchase a 40% stake in bank loans with a combined unpaid balance of about $3 billion.

Late Wednesday, the Miami-based company said it closed transactions with the FDIC to buy two portfolios of loans for $243 million.

Lennar subsidiary Rialto Capital Advisors will conduct the daily management and workout of the portfolios, the company said.

This wouldn't be much of a story except for two things.

One: Lennar has apparently done this before in the 90's with great success. So, perhaps management can't manage the company well during booms—its stock price did collapse from the $60s down to the present $20s—but they may be very good during tough times. Analysts quoted in the article are skeptical that Lennar can repeat its past performance but this looks like a good deal for them.

Secondly, I'm not familiar with the FDIC or how they price liabilities but it looks like the FDIC is very bullish on transactions such as these. The MarketWatch article mentions that the FDIC is financing the deal with, what appears as, very favourable terms for Lennar:

Lennar has purchased a 40% interest in the loan portfolios, while the FDIC is keeping the remaining 60% equity interest. The FDIC provided $627 million of financing at no interest for seven years.

With FDIC kicking in about $365 million in equity, Wall Street analysts pegged the portfolios' overall purchase price at $1.22 billion, or 40 cents on the dollar.

My impression is that the FDIC is very conservatively-run and they probably have some of the best risk managers out there (at least outside the major Wall Street firms.) Risk is their main "business" so they wouldn't be cutting deals like this without a good understanding of potential losses and benefits for taxpayers.

Deals like these seem unusual (compared to the last 10 or 15 years) and I feel it is bullish for the real estate market, and hence the US economy in general. The key to all this is for the FDIC to price everything properly so that taxpayers aren't being looted, or conversely, private sector is disincentivized from considering these transactions.


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