Berkshire Hathaway Tussles Over ResCap Mortgage Assets

Residential Capital, the troubled mortgage unit of General Motors' Ally Financial, is attracting some attention these days. The bankruptcy filing last month of one of the nation's largest mortgage servicing entities was going as well as could be expected. Nationstar Mortgage Holdings (NYSE: NSM  ) , a subsidiary of Fortress Investment Group (NYSE: FIG  ) , met with ResCap's approval to be the initial bidder for the failed servicer's assets, and Fannie and Freddie agreed. Ally was to fulfill the role of lead bidder for ResCap's loan portfolio.

Suddenly, the sleeping giant awoke. Berkshire Hathaway (NYSE: BRK-A  ) , a major investor in ResCap, lumbered onto the scene, demanding to be awarded the slot of initial bidder for both bundles of goodies. A bankruptcy judge has decided to split the baby, giving Warren Buffett's company the lead on the loan portfolio assets, but keeping NationStar as the initial bidder for ResCap's servicing rights.

A turnaround for Berkshire
Previously, Buffett's company had declined to be a part of the bankruptcy proceedings, declaring that such a procedure would not be in the best interests of investors, the U.S. Treasury -- which owns 74% of Ally -- or the company. Berkshire instead offered to buy ResCap for $1.00, assuming the company's debt and splitting any future liabilities. Actually, filing bankruptcy was not in Berkshire's best interests, since it owned much of ResCap's unsecured debt. In the end, the decision was made to proceed with the bankruptcy, and Fortress was chosen to be the company to set the minimum bid for the auction of the servicing rights.

The agreement guaranteed Fortress a $72 million breakup fee if it turned out not to win with its bid of $2.4 billion, later raised by another $125 million after Berkshire stormed onto the stage. Originally, Buffett's company offered to meet the original bid, as well as take a discounted $60 million breakup fee. With the judge's decision, Berkshire will replace Ally's $1.4 billion offer for the loan portfolio with a $1.45 billion bid.

Fool's take
Why is Buffett suddenly so interested in these units? While some say that he's just looking to flip undervalued assets, others think it's all part of his housing-revival stance.  I would agree with the latter camp and even suggest that it is actually mortgages that he's interested in, and the servicing rights that go along with them.

To wit, Berkshire is heavily invested in Wells Fargo (NYSE: WFC  ) , which currently holds the No. 1 spot in mortgage originations, writing approximately one-third of all home loans in the United States. Another of Buffett's holdings, Bank of America (NYSE: BAC  ) , may have caught his attention recently when it sold a ton of mortgage servicing rights to NationStar. The fact that there could be $4 trillion worth of these deals coming along as banks scramble to adhere to tougher capital requirements may have caught even the big man's notice.

One thing is for certain: Buffett is not in the habit of making lousy business decisions, so if his company is hot for mortgages and their servicing rights, then these things are valuable. Financial investors would be wise to keep an eye on developments in this sector.

The financial sector has always been a favorite of Buffett's, and with good reason: It is very profitable. Our banking analysts have put together a special report that will show you the type of banking stocks Buffett himself cut his teeth on. See why "The Stocks Only the Smartest Investors Are Buying" is a must-read. Go ahead -- it's free.

Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of Bank of America, Berkshire Hathaway, and Wells Fargo and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Wells Fargo, and General Motors. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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