June 22, 2012
By: John Clark
Warren Buffett’s company, Berkshire Hathaway Inc., is making moves to purchase mortgage assets owned by Residential Capital LLC (ResCap), which filed for bankruptcy protection a few weeks ago, according to a NASDAQ report.
ResCap is more commonly known as the mortgage unit of Ally Financial, which is partially owned by the federal government. The recent housing crisis sunk the finances of ResCap, and forced its parent company to send it to bankruptcy court.
Sources say Rescap holds a portfolio of mortgages that is worth roughly $374 billion, and the company hopes to sell these mortgages to help repay its debts. But the high volume of mortgages owned by the company has led to a bidding war between two competing buyers.
In one corner is the billionaire Buffett, who has gained a reputation for buying undervalued assets and spinning them into gold. If he has his eye on ResCap’s mortgage units, it’s a sure sign that he believes they could be worth a fortune in the future.
In the other corner, though, is Nationstar Mortgage Holdings Inc., which is a mortgage service owned by Fortress Investment Group LLC., which, if nothing else, has a more intimidating name than Buffett’s company.
But the bidding war may not be an even match, as ResCap has already agreed to a purchase deal with Nationstar, although this proposed deal still must be approved by the U.S. Bankruptcy Court.
And the bankruptcy court is not yet prepared to give the deal its blessing, given its recent decision to appoint an independent examiner to investigate past dealings between ResCap and its suitor.
Sources believe that the bankruptcy court may be suspicious about the proposed deal because Berkshire Hathaway’s offer for the mortgage portfolio is actually a better bargain. Buffett’s company agreed to a smaller fee package if deal fell through, sources indicate.
Specifically, Berkshire told the court that it set a purchase price for the units “on substantially the same terms as the agreement with Nationstar,” but it is only asking for a $24 million “breakup fee” if the deal wasn’t approved. This is much smaller than Nationstar’s proposed $72 million fee.
Since the purpose of the sale is to help ResCap recover as much money as possible so it can repay creditors, it seems that Buffett has a strong argument that his company should win the bid.
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