Offshore Fund Eyes Nonperforming U.S. Loans

Nonperforming U.S. mortgages have reached the point in the cycle where they are cheap enough to buy, according to at least one asset manager that has started two offshore investment funds to do this.

"We think it's the opportune time," said Jeffrey Kirsch, managing principal of ARE Asset Management. "We think the bottom is approaching and it's vital that we enter the market before we hit a bottom."

Several new funds have been formed recently to capitalize on the "low" prices in portions of today's liquidity-strapped market and there has been some question as to whether this might help or be a sign of market recovery.

When asked what differentiates ARE's new Tortola, British Virgin Islands-based funds from mortgage-related investment vehicles, Mr. Kirsch noted that ARE has ownership in a retail originator and servicer and probably has "as much experience in the acquisition and liquidation of nonperforming mortgages as anyone.

"That has been our niche," said Mr. Kirsch, who has been acquiring and resolving nonperforming mortgages on behalf of non-domestic private investment funds and individually managed accounts since 1996.

ARE's originator is Seattle-based Go Solutions, which it started in January and which specializes in resale to the agencies, he said.

Its servicer is the Plano, Texas-based loss mitigation and default specialist SRG (Strategic Recovery Group LLC), which it started about 18 months ago, Mr. Kirsch said.

He noted that "starting a servicer from scratch" was a "time-consuming" and "costly" process due to licensing and bonding requirements as well as the fact that the currently challenging market environment is one in which regulators have been closely watching the servicing of loans in their states.

Mr. Kirsch also noted that ARE has "the experience to shadow service.

"It's always a good thing to monitor your servicer," he said. "It's not the best idea to just turn your assets over to any servicer and hope for the best."

The funds' Tortola location is advantageous tax-wise and is not necessarily that distinct from any other offshore location offering such advantages except in terms of legal representation, Mr. Kirsch said, when asked about it. ARE itself is U.S. domiciled and regulated, he noted.

Mr. Kirsch added that he is glad the funds were set up in Tortola ahead of what he said is likely to be a wave of offshore moves in reaction to the recent U.S. Treasury proposal for market reform, which appears to have implications related to setting increased regulation on hedge funds.

The two funds are "structured as a unique variant of the master-feeder arrangement, with a fixed-income feeder providing leverage to master opportunity fund," according to a company press release.

The former is an open-end fund "with a range of share classes, dividend rates and lock-up terms" that aims to provide investors with monthly fixed dividends "using highly collateralized, low principal risk investment."

The latter is "open to non-domestic, accredited investors such as high-net-worth individuals, mutual funds, hedge funds and institutions" and aims to provide "the potential for higher yields through direct investments in the portfolio."

In addition to buying nonperforming loans from investment and commercial banks and hedge funds, the new funds' investment strategy includes new originations secured by commercial properties.

Specifically, these new originations would be low loan-to-value ratio, hard-money and bridge loans, the company said.

With this strategy, ARE believes that - in the right interest rate scenario - "a U.S. real estate portfolio based upon accurate appraisals and aggressive loan servicing has the potential to yield above-average returns." ARE's fund administrator is Viteos Fund Services, a division of Viteos Capital Markets Ltd. that counts Wall Street firm Credit Suisse among its backers and has offices in the U.S., India and the Cayman Islands. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/