The Real Deal New York

This hedge fund is making billions off distressed borrowers

The company scooped up second-lien bonds
December 26, 2018 11:30AM

(Credit: iStock)

Just before the 2008 financial crisis, Fir Tree predicted that homeowners would keep making mortgage payments even as the value of their homes plummeted. That bet has paid off.

The hedge fund has made $2.6 billion, roughly half of which came from homeowners making payments on underwater mortgages, the Wall Street Journal reported. The other half came from forcing banks to pay up on defaulted loans.

Like investor John Paulson, the company banked on the market crashing. Fir Tree picked up second-lien bonds expecting to — at the very least — break even if most of the loans defaulted. But the company correctly predicted that borrowers wouldn’t walk away from their mortgages even as their home values fell well below their debt.

“Even highly distressed borrowers pay off their obligations since they care about their credit,” Clinton Biondo, managing partner at Fir Tree, told the Journal.

As the hedge fund continues to collect on its bet, the U.S. housing market is showing signs of a cool down. Median home prices across the country fell in the fourth quarter to their lowest levels of affordability since the third quarter of 2008, according a report released earlier this month by real estate data firm Attom Data Solutions. [WSJ] — Kathryn Brenzel