Hedge fund Fortress Investment Group is planning to buy Fremont Investment & Loan's subprime operations, according to sources close to the deal. The acquisition, which is awaiting due diligence and a final agreement, would be the second such deal for Fortress. The firm acquired subprime lender Centex Home Equity in July of last year.
Fortress did not return a request for comment by press time. The recent purchase helps to solidify an emerging role among hedge funds as supporters of the subprime lending market.
Hedge funds have long been prominent antagonists in the subprime mortgage saga. They swept in first to short the stock of subprime lenders, then moved on to the HEL bonds that they issued - a play which pitted them against CDOs in a game of pricing tug-of-war that has colored both the cash and synthetic markets for months.
Although a number of hedge fund sources point out that they've been buyers of CDO equity and subprime residuals, others argue their presence has been a driving force behind deflating subprime debt and equity prices. Currently, the funds are increasingly embracing a new role: that of liquidity provider.
Some market observers, however, speculate that the most lucrative spot for hedge funds seeking relative value might be back on the other side of the fence, pointing out that only a handful have chosen to cross over. The sources cited regulatory pressure surrounding subprime originators and the uncertain value of the lenders' books of business. "Busted subprime mortgage lenders are a dime a dozen," said one structured finance analyst.
Citadel last month purchased certain assets from now bankrupt ResMae Mortgage, while Farallon Capital Management, a liquidity provider to Accredited Home Lenders, is rumored to be in takeover talks with the lender.
Fremont announced last week that it entered into an agreement to sell roughly $2.9 billion of its subprime mortgage portfolio and planned to sell most of its residential real estate business and assets to the same buyer. The $2.9 billion of subprime loans nearly constitute Fremont's entire portfolio, and will be sold at a $100 million loss, according to the Santa Monica, Calif.-based lender.
Fortress, in exclusive negotiations with Fremont, signed a letter of intent last week, sources said. Credit Suisse is advising on the deal, which includes Fremont's subprime residential loan servicing platform and a portion of its subprime loan origination platform. The letter of intent also calls for the sale of mortgage servicing rights, servicing advances, residual interests and MBS, according to Fremont.
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