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Capmark Portfolio to Buffett? Capmark Servicing to Buffett?

Washington-It looks as though value investor Warren Buffett is going bottom fishing in the commercial mortgage business.

Mr. Buffett's Berkshire Hathaway Inc. and Leucadia National Corp. are teaming up to buy Capmark Financial Group's struggling commercial mortgage servicing and production units for a reported $490 million.

Capmark - whose business includes the old GMAC Commercial Mortgage unit out of Horsham, Pa. - is the nation's third largest commercial servicer with $248 billion in receivables at mid-year. It is also a top ranked Fannie Mae DUS multifamily servicer.

Even though delinquencies on commercial mortgages have been benign compared to residential late payments, analysts expect a major spike in commercial late payments in the quarters ahead.

The weak U.S. economy has hurt the value of all types of commercial properties, with struggling businesses failing or reducing the amount of office and retail space they need. Also, rents in many major markets have been weak.

Berkshire/Leucadia's bid for this top ranked player in commercial lending and servicing came shortly after Capmark said it may file for Chapter 11 bankruptcy protection. The lender/servicer's delinquent commercial mortgages left it with a $1.62 billion second-quarter loss.

Additionally, it had negative equity of $1.14 billion as of June 30. According to Moody's Investors Service, Capmark is one of the largest U.S. commercial real estate lenders, with more than $10 billion of originations in 2008.

In a statement, Capmark said it paid a Berkshire-Leucadia joint venture, Berkadia III LLC, $40 million to enter the mortgage asset sale agreement. It noted that if a sale occurs through the bankruptcy process, Berkadia will pay $415 million in cash and receive a $75 million note. If it occurs outside bankruptcy, Berkadia would pay $375 million in cash and get the $75 million note, and retain a $40 million "holdback" to cover indemnity claims.

Capmark's mortgage assets have been deteriorating since at least mid-2007. The company said that because of its current financial condition, its unsecured corporate credit ratings "were reduced to below investment grade by each of the major national credit rating agencies during the first quarter of 2009."

The downgrades have had multiple negative effects on Capmark's business, increasing, in a major way, its borrowing costs on bridge loans, senior credit facilities, and senior notes.

Capmark had 1,600 employees in 37 offices worldwide at mid-year. In 2006, an investor group led by affiliates of Kohlberg Kravis Roberts & Co., Five Mile Capital Partners LLC, and Goldman Sachs Capital Partners bought a majority stake in GMAC Commercial and changed its name to Capmark.

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