Smart-Stock.net

Last week’s blog about the dallasnews.com piece only covered half of the article, so  I thought it would be worth summarizing the remainder.

One interesting point that authors Brendan Case and Cheryl Hall make is that distressed asset investment isn’t just for mega-rich hedge funds.  Instead, Case and Hall write that rich individuals, pension funds, and endowments (which include Texas schoolteachers) are also turning their attention toward distressed assets.

Craig Hall, the Dallas real estate developer quoted earlier in the article, is considering an investment in both distressed paper assets like mortgages and in hard assets like commercial realty, condominiums, and residential lots, which he would likely directly purchase from the owners.  Hall echos the need for “patience and staying power,” given that it is difficult to value these assets in the short term.  “It’s going to be six years, not a year or two,” he said.

As for those Texas teachers, via their Teacher Retirement System (a $100 billion strong pension fund), they have invested in $250 million worth of a $22 billion mortgage portfolio from UBS, a Swiss bank.  Frank Wiley, president and CEO of Dallas-based Commerce Street Capital LLC and trustee on the Texas teacher pension fund, is enthusiastic about the deal: “We’re going right into the epicenter of the problem. I wake up at 3 a.m. I can’t sleep. I’m so excited about the opportunities.”

Maybe that’s why these folks are excited, too?

Since financial matters tend toward the labyrinthine, it might be helpful to get a very straightforward refresher on distressed asset investing.  This link does a good job of presenting an understandable description.

The analogy that author Murray Priestley makes is that of a garage sale.  What might cost a dollar retail is obtainable for pennies used.   By definition, a distressed asset is one purchased from a company in dire financial straits, which is selling its assets for extremely low prices (”everything must go!” etc.).  It’s important to distinguish between the flailing company and the assets themselves, which might be capable of fetching a great price at a later date.

It’s possible to invest both directly and indirectly in distressed assets.  Direct investment is the act of buying and selling the assets yourself, and can be very very profitable.  Indirect investment is the practice of investing money into a distressed asset fund, which buys and manages the funds for you.  While more cautious, this method is often more prudent and ensures a more diversified portfolio of different accounts.

Priestly sums it up well:  “The growth opportunities are massive for companies as assets are available that, in a bullish market, would have been too expensive.”

In case there was any doubt, 2007 mortgages are in serious trouble. The Federal Deposit Insurance Corporation’s analysis, which ran in The Wall Street Journal, indicates that .91% of 2007 prime mortgages were “seriously delinquent” (i.e., in foreclosure or 90 days late) after a year, compared to just .33% in 2006. That’s almost a three-fold increase!

Freddie Mac reports much the same, with 1.38% of 2007 loans being delinquent, compared to .38% of 2006 loans.

According to Mark Zandi, chief economist for Moody’s Economy.com, “foreclosures will remain at record highs, the financial system will be under severe stress and the broader economy will sputter.” He goes on to say that more recent loans, those from 4th quarter 2007 and early 2008, seem to performing more successfully.

What this means for resourceful investors is that there are a disproportionate number of distressed 2007 mortgages littering the financial landscape right now. As we’ve already mentioned in this blog, the trading of distressed debt is increasingly popular on Wall Street, and an increasing number of investment companies are making a profit from this practice.

For those who are in a position to invest in these companies, now is the time to do so.