The Wall Street Journal recently reported that hedge-fund firm Fir Tree made $2.6 billion, and counting, in an unexpected bet before the housing bubble burst of 2008: that homeowners would keep paying their mortgages.
Putting Faith in Homebuyers Paying Mortgages
The details were gained after the Journal reviewed an investor letter in late 2018, revealing a surprising strategy on Fir Tree’s part. The firm picked up the abnormally low sub-prime mortgages and carefully sold them, banking on the idea that Americans would want to push forward with the American dream of owning a home and raising a family in it, regardless of the home’s dollar value.
As it turned out, they were right. Half of the $2.6 billion came from homeowners doing exactly that. While many property owners made their purchases as investments and bailed out on them during the crash, people who bought homes to live in for decades to come had expected to pay their mortgages, and did. The value of their homes was in the building itself and the lifestyle it provided, not the market.
Good Credit and Tough Housing Market Played a Part
An additional factor may have been that the typical homeowner cares about their credit. Considering that perspective, defaulting on a loan is a much worse option than continuing to pay for a home that will likely never be worth as much as its cost at the time of purchase.
What’s more, bailing out of one mortgage during the housing crash in hope of finding a better deal elsewhere seemed an unwise choice at the time. “I advised all my clients to get loan modifications and fight fiercely to hang onto their homes because buying another would be more difficult,” bankruptcy attorney Stephen Burton shared after the Journal’s story broke. It appears he wasn’t the only one giving that advice.
Keeping Banks Liable for Defaulted Loans
The other half of the 42.6 billion came from holding banks accountable for their practices. Forcing banks to pay up on defaulted loans helped ensure that Fir Tree made the most of their gamble.
And a gamble it was. By 2013 Fir Tree had spent $1 billion in second-lien loans with a face value of $9 billion. The firm banked on the crash like everyone else, but in a different way, hoping to at least break even on their investment because the securities were so cheap. In the end, they did much more than break even.
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Stephen Burton has served as an attorney for bankruptcy trustees, taught bankruptcy at the National Business Institute and practiced before the bankruptcy courts. He regularly attends continuing education classes. As a consequence, virtually every case he files is successful.