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
Suddenly, the sleeping giant awoke. Berkshire Hathaway
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.
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
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.
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