Williams & Williams Starts New REO Hedge Fund

The best course of action in today's mortgage market remains a matter of perspective. Many are selling, private investors are buying and expanded REO management operations are hoping for long-term profit. Instead, auctioneer Williams & Williams here turned hedger in June.

The reason, Williams & Williams president and CEO Dean C. Williams told MSN, is his belief it ultimately compliments the auctioning practice. So far from creating a conflict of interest, it serves it well. The logic behind the newly founded REO hedge fund is based on a wider view of the core services it offers.

"At the core of what our company is all about is trying to make real estate more liquid," Mr. Williams said. "We're sort of trying to decrease the waste involved in transferring a home from one owner to another."

That is and has always been "the core of our business," he said. In addition to the auction-based services it offers, there also are other sellers in the market including individuals and institutions "that for whatever reason are not able to avail themselves that option and/or prefer the lower risk of a done deal at a preset price."

The Williams Merchant Group was created to do just that, provide what a secondary market for REO offers.

"Basically it is an investment fund to buy vacant real estate," he said. "Obviously in mortgage banking it means foreclosed homes."

It also buys the nonperforming loans subject to foreclosure, he explained, meaning it also does transactions involving properties before they turn into REO, which results in mortgage lenders getting title either a foreclosure of a deed-in-lieu, or pre-foreclosure contracts, in addition to acquiring the REO post-foreclosure.

And so far so good, "it has been going pretty well," he said, since early spring when the new hedge fund opened its doors.

"The prices that are being asked by the sellers generally reflect the cost that they have always accrued to get liquid, which ranges from 25% to 50%, I've never seen a pool priced with less than a 25% discount. We increasingly see pools priced with a 50% discount."

He stressed, however, that it does not mean there is a proportionate increase in the purchasing power of WMG funds and finally auction sales returns.

"The trade point, that bid and acceptance point is market driven of course, and what affects that is not just the supply issue," he said. "Vacant homes are hard to be sold by a Wall Street holder."

He believes the main factor is the macroeconomic picture of the marketplace, plus the direction prices are going, as well as the microeconomic factors in a specific area. For example, if the real estate prices are going down, "that's when the discount goes up, because you have to factor in deflation of the underlying value of the homes themselves if their actual value is going down each day."

While that causes the discount to spread, he added, it is business as usual for WMG since it does not hold loans longer than a month.

"No matter where the market is going we will sell the assets on our auction platform 30 days later."

While many industry veterans are handling the current meltdown by following a buy-and-hold long-term investment strategy that involves highlighting REO management, WMG favors the short-term approach.

Mr. Williams agrees many individual investors who specialize in buying rental homes "are in a buy-and-hold long-term strategy," while mortgage investors or sellers who have hundreds, if not thousands of properties, are not holding on to these homes. Large lenders, wholesalers, often prefer to balance their books and minimize loss by selling to the biggest bidder, it being a private money investor or auction sale of distressed properties.

As of now, he explained, the issue at hand in the marketplace is not so much sales price differences.

"With everybody we're bidding against, the only issue is they are using a traditional sales system through a default servicer that's an agent based sales system vs. auction? That's the only differences we've seen so far."

If so, who tends to make a higher profit during the sales process, or what method is more efficient in minimizing related loss?

"The only way I can answer that is are we able to pay the price the market is asking? The answer is yes."

Lenders need and are willing to liquidate REO inventory and the traditional way has always been costly, he argued, as the inventory builds up it adds to the size of the problem, it does not change it.

WMG is interested in buying REO property pools "and we're not having problems in doing that." And apparently it has been good business for WMG.

"We may pay for instance 60 cents on the dollar for a $200 million block of homes and the homes themselves individually may sell anywhere from 50 cents on the dollar to 150 cents on the dollar."

It offers the benefit of buying at wholesale and selling at retail prices, which is favored by the favored by the fact that Mr. Williams also owns an auction company.

Competitors, he added, either do not own an auction platform, or are not comfortable with auctions. Asked whether he would start an REO hedge fund if he were not an auctioneer as well, if he did not own Williams & Williams, "No I wouldn't," he said.

"I think the real estate market has a long way to go until it hits bottom. It will probably take many years to occur. So if I did not have the auction platform we wouldn't have created this fund."