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Warren Buffett Ups the Ante in ResCap Bidding War

NEW YORK ( TheStreet)-- Berkshire Hathaway (BRK-B) and Nationstar Mortgage Holdings (NSM - Get Report) both raised their offers on Monday to become the "stalking horse" or leading bidder for parts of Residential Capital LLC, the nation's fifth-largest mortgage servicer.

ResCap, the main mortgage division of Ally Financial, filed for bankruptcy protection last month, naming Nationstar as the stalking horse for servicing rights on 2.4 million home loans. Berkshire Hathaway, however, last week offered a competing bid with a lower breakup fee in case its bid is not ultimately chosen. In bankruptcy court on Monday, both Berkshire and Nationstar raised their bids and lowered their proposed breakup fees, according to a report published late Monday by Keefe, Bruyette & Woods analyst Bose George.

"In our view, the competitive bidding is a modest negative for both Nationstar and to some degree for other public special servicers. Given Nationstar's reduced breakup fee, we believe the probability of competitive bids has increased," George wrote. The analyst, who in an earlier report on Monday had dismissed Berkshire's interest in the assets as a strategic ploy to protect its position as one of ResCap chief creditors, now believes Berkshire "might be genuinely interested in purchasing this platform, which if successful could create a strong competitor to the public special servicers."

The judge in the case is scheduled to choose a stalking horse bidder during a hearing at 11:30 on Tuesday. After a stalking horse is chosen, other bidders are expected to emerge. Both Ocwen Financial (OCN - Get Report) and Lone Star Funds have publicly expressed interest in the assets.

Also on Monday, ResCap's bankruptcy judge approved an independent investigation into both pre- and post-bankruptcy transactions involving ResCap and Ally (formerly GMAC). Attorneys for Berkshire Hathaway, which sought the probe, had raised questions about "dozens of transactions with Ally and its affiliates involving billions of dollars of asset transfers and intercompany financing."

Days after requesting the investigation, Berkshire unloaded a $500 million unsecured bond position in ResCap--its entire unsecured stake and 40% of the total unsecured debt outstanding on the company. Berkshire told the court it still owns 40% of ResCap's junior secured bonds.

-- Written by Dan Freed in New York.

Follow this writer on Twitter.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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