Many in the real estate industry were not surprised to hear the name of Cerberus mentioned as the party which acquired the UK government’s £13 billion (face value) portfolio of Northern Rock mortgages. These mortgages were acquired in the depths of the 2008 recession at a fraction of their face value. At this moment in time it is unclear exactly what Cerberus paid for the portfolio but as the company paid just £1.1 billion for a £4.8 billion RBS Irish loan portfolio last December we can guess it was a good price!
This is a company which specialises in distressed assets, private equity, lending and real estate so the acquisition of various mortgage portfolios below face value would seem to fit in with their investment strategy.
Are there more to follow?
There are numerous banks and governments around the world who were left holding the can for many loan defaults caused by the 2008 recession. At a time when real estate markets around the world are showing more strength than many had expected it would seem sensible to reduce exposure going forward. The fact that many of these loan portfolios are changing hands at well below their face value has caught the attention of so-called “vulture funds”.
It goes without saying that many more similar transactions will emerge over the coming weeks and months with areas such as Spain and Portugal for example still struggling. Eliminating the overhang of distressed property/mortgages from these markets would not only help sentiment but also possibly encourage buyers. However, there have been some concerns expressed about the way in which Cerberus has been treating its newly acquired customers.
Has the management style changed?
There is no doubt that Cerberus and other similar companies operate in an area of the market which is far removed from the traditional mortgage arena. These are mortgage portfolios which were acquired as a means of supporting financial markets around the world. Indeed many of them came under government control and these governments were unable to clamp down hard on the connected customers for fear of political fallout. So, in effect many of them are now being transferred from a culture of government control to the open market.
The Irish loan acquisition has attracted a number of unhelpful headlines amid a whole host of rumours and counter rumours. Indeed the company is currently making representations to Northern Irish MPs at Stormont and we await further details with interest. There are strict legal obligations taken on by those acquiring mortgage portfolios and there is no reason to suggest these have been broken.
Governments and troubled banks around the world have been waiting for this moment to jettison their distressed loan books to the highest bidder. Enormous mortgage portfolios are now changing hands at a fraction of their face value as they move from government control to the free market. These investment companies are taking a major gamble on a recovery in various real estate markets around the world although the difference between the purchase price and face value has given them significant headroom in the event of choppy waters ahead.