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Bailing Out Banks, One Toxic Asset At A Time
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Bailing Out Banks, One Toxic Asset At A Time

Bailing Out Banks, One Toxic Asset At A Time

Bailing Out Banks, One Toxic Asset At A Time
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  • <iframe src="https://www.npr.org/player/embed/101227971/101270214" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript
Raj Bhatia and Albert Behin see tremendous opportunities in buying residential debt.

Raj Bhatia and Albert Behin see "tremendous opportunities" in buying residential debt. Kirby Hamilton/iStockphoto.com hide caption

toggle caption Kirby Hamilton/iStockphoto.com

It’s Your Recession.

We’re just blogging it...

Former hedge fund manager Raj Bhatia and mortgage broker Albert Behin are convinced they can make money buying "toxic assets" — the stuff that's killing banks' balance sheets.

Bhatia and Behin buy pools of mortgages that are "underwater," meaning the homes are worth much less than their mortgages.

"We got together and basically said, 'You know, there's going to be tremendous opportunities buying some of this residential debt that I basically helped create over the past six, seven, eight years,'" Behin says.

For Bhatia, who graduated from Columbia Business School in the mid-1990s, that means "getting dirty" — moving out from behind a desk and into the world. Bhatia and Behin travel around, meeting potential investors and checking out the houses with mortgages they may buy.

"My fellow Ivy League MBAs think I'm nuts 'cause I'm going to get dirty," Bhatia says.

Homes Underwater

Behin started selling mortgages in 2000, just as housing prices began to skyrocket. He says he saw a lot of the abuses and terrible lending practices, and he steered clear of most of that.

Now, as those mortgages are starting to go bad, Behin and Bhatia are looking to buy them up at a discount, and they're meeting with potential investors like Benek Oster, who made millions in finance over the years. The three met recently at a diner in North Bergen, N.J.

"Hypothetically, I've got $5 million I'd like to put in. How much are you buying, how many loans are you getting for $5 million?" Oster asks.

Behin tells Oster that for $5 million, they could buy about 50 home loans.

Would there be enough homes if someone gave them $100 million?

"Yes," Bhatia says.

"Are you just saying that?" Oster asks.

"No, not at all. There's $7 trillion of mortgages underwater right now," Bhatia says.

How It Works

Banks have given lots and lots of mortgages to people who've stopped paying. To get the mortgages off their books, the banks have sold them off at huge discounts. And they do it in massive numbers — thousands of mortgages at a time — to hedge funds and other large investment funds.

A lot of these hedge funds don't actually want to keep these mortgages.

They bought them just to trade them, the way they'd buy gold, oil or pork bellies.

The funds buy low, mark up the price a little and then sell to guys like Bhatia and Behin for a profit.

The two have lined up a couple of investors, and now they're getting ready to buy some mortgages. They're thinking of picking up 40 mortgages connected to homes in New Jersey, and they want go see what they're buying. So the two head to Wayne, a small town about 20 miles from New York City.

Behin and Bhatia have made more than a dozen trips so far to look at different homes.

"One of the first times Raj came out to see houses — I went out a couple of times already — and we're just snapping a picture of the subject property, and Raj is like, 'There's a cop,' " Behin says. "We're not doing anything wrong. We're just snapping a picture of a house. Relax there."

"I'm not cut out for field work," Bhatia says.

A Bargain

Now here's the math: The hedge fund bought the mortgages at roughly 30 cents on the dollar.

Meaning, if the bank made the original loan for $100,000, the hedge fund gets it for $30,000.

The hedge fund is looking to sell to Bhatia and Behin for around 40 cents on the dollar.

The two know certain things about this group of loans. They know that 90 percent of the houses are in foreclosure. They know the group is made up of what are called Alt A loans — which are basically a step above subprime.

They also know interest rates on the loan are as high as 12 percent.

But there are a lot of things the mortgage documents can't tell you.

For instance, Bhatia and Behin don't even know if someone's living in the house they're about to go look at or what the neighborhood is like.

On a drive near the house, Bhatia likes what he sees.

"OK, nice neighborhood. You can imagine what this looks like in the summertime with all the canopy of trees. It's an established area. I'm really impressed with this. These homes are great," Bhatia says.

Behin notices another good sign: no "for sale" signs.

"You'll see one or two coming up, I'm sure but, not yet," Behin says.

In other words, the market's not glutted. If they take over the house, they can sell it.

The house is a red colonial on a suburban street. The lawn is well-manicured.

"We can see that there are kids there," Behin says. "This is a neighborhood where you grow up a family. There's a backyard. This house is in generally good condition."

According to the paperwork, in the fall of 2007 the house's appraised value was $635,000.

Now it's down to $440,000, which is pretty bad, if you consider that the owners owe $475,000 on it.

The current homeowners are underwater; they haven't made a mortgage payment in 16 months.

Bhatia and Behin say they can get the mortgage for $200,000.

A bargain. And then, as investors, they have several options.

Options

Option No. 1: They can approach the homeowner to try to rewrite the mortgage.

"Their monthly payments can go down from $1,300 to $500 a month. And we're making an incredibly good return on our money," Bhatia says.

But, he says, many homeowners in this situation can't even afford that much. So there's option No. 2: The home goes into foreclosure and the homeowners can rent it.

Option No. 3: They can pay the homeowner to leave. In that situation, Bhatia has a simple pitch to the homeowners.

"Why don't we help you by writing a check for $5,000 to $7,000, and you just give us the keys and we'll take over the home," he says.

A Drop In The Bucket

What Bhatia and Behin are doing may seem like a free-market solution to the crisis. But they're only two guys.

"There are not enough of us out there to absorb what's out there," Bhatia says. "You got to remember, there's trillions of dollars of product right now that has to be dealt with, that has to be worked through, and it's certainly not going to happen with just a few people putting $10 million, $15 million, $20 million of this product away."

And here's another problem. Bhatia and Behin, as hard as they're working and as complicated as it seems, are actually dealing with the simplest assets out there — home loans between a bank and a person.

They're not dealing in the complex world of mortgage-backed securities, where mortgages were bundled, sliced and sold to thousands of investors, and where it's almost impossible to figure out what you're buying and who you're buying it from.

Essentially, Bhatia and Behin are buying the least toxic of the toxic assets on banks' balance sheets.

Now, someone just needs to buy the rest.

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