Newcastle Buying Subprime Portfolio

Plus, Accredited seeks added liquidity.
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Newcastle Investment (NCT) agreed to buy a $1.7 billion portfolio of 7,300 subprime residential mortgage loans.

The New York-based investment company didn't name the seller but said it expects the deal to close in the next month. It said 28% of the assets are located in California, 13% in Florida, 10% in New York and the remaining balance diversified throughout 45 states. Approximately 94% of the portfolio is secured by first liens and 92% of the assets are owner occupied.

"We are very excited about this transaction," said CEO Kenneth Riis. "Constrained liquidity and the re-pricing of credit risk in the subprime mortgage market have created a unique opportunity for us to purchase a portfolio of loans at an attractive price with early payment default protection. We have underwritten this investment to generate an attractive return on capital using conservative default and loss assumptions."

The news comes just days after struggling mortgage player

Accredited Home

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said it had agreed to sell substantially all of its $2.7 billion in loans held for sale in a bid to meet margin calls. News of Accredited's sale agreement, along with comments from big brokerage houses that they would be buyers of subprime assets at fire sale prices, have propped up shares of the subprime lenders in recent days after a sharp plunge earlier in the week.

Accredited said Monday it is currently in discussions regarding a possible financing arrangement with a third party that would provide additional liquidity. The company also got a Nasdaq delisting notice because of its failure to file its annual report on time. The company said it will request a hearing, which will have the effect of staying the delisting.

Accredited also said it and its top officers were named in a class action suit alleging the company issued materially false and misleading statements about its business and financial results, causing its stock to trade at artificially inflated prices. Accredited said it believes that the lawsuit has no merit and intends to defend the case vigorously.

Newcastle said its acquisition will initially be financed under a repurchase agreement. The company expects to finance this investment on a long-term basis through the securitization markets in the upcoming months, following which it expects to have approximately $75 million of capital invested in this portfolio.