Lone Star invests $1 billion in high-risk Caliber loans

New loans will target Alt-A and "high quality" subprime borrowers

Lone Star Funds is looking to increase its portfolio of high-risk loans by a substantial amount.

According to a new report by Bloomberg Businessweek, the private equity firm is seeking to raise $1 billion for a fund to buy the riskiest portions of bonds backed by loans given to borrowers outside the realm of agency-affiliated lending.

The mortgages will be originated by Caliber Home Loans, which recently announced that it would be offering four new non-agency lending products in a effort to help more potential borrowers get financing for a new home.

The four types of loans include: the “Fresh Start” program, Foreign Nationals, Non-Warrantable Condos and Non-Agency alternatives. The Fresh Start program specifically is designed to help borrowers who may have experienced a credit event but cannot afford a program in the marketplace that meets their needs as they re-establish a strong credit history.

It is unknown if the four new programs will be part of the Lone Star Funds portfolio, but Bloomberg shared some additional details about the nature of the Lone Star/Caliber plan.

Lone Star plans to benefit from a gap in lending left by big banks such as Wells Fargo & Co. and JPMorgan Chase & Co., which have scaled back originations after suffering unprecedented losses on loans, lawsuits and regulatory penalties tied to the housing collapse.

The new loans from Caliber will be granted mostly to Alt-A borrowers — those who are self-employed or have limited documentation — along with some “high-quality” subprime customers, according to the marketing materials from Dallas-based Lone Star. They’ll target Americans with credit scores of 580 to 700. Interest rates will be as high as 10%, and loans will be for about 75% of property values.

Lone Star Funds has made quite the name for itself in the last few months when it comes to buying up distressed loans. In June, it was named the sole winner of distressed loan auction from the U.S. Department of Housing and Urban Development.

HUD said that this was the first time in the history of its Distressed Asset Stabilization Program that a single bidder submitted the highest bid on “each and every pool.”

HUD said that the sale involved a total of 23,000 defaulted single-family loans with $3.9 billion in unpaid principle. The auction consisted of 16 pools of loans, varying in size from $93 million to $1 billion.

And last month, a group of community organizations and struggling homeowners announced an effort to stop the HUD distressed loan auctions.

“We’re seeing an unprecedented rise of the corporate landlord, and HUD’s DASP is just facilitating the process,” Rachel Laforest, executive director of the Right To The City Alliance, said last month.

“HUD should employ a credit system that favors nonprofit bidders whose sole mission is community investment — and implement stronger requirements for bid winners that preserve homeownership and give struggling families affordable housing options. With today’s actions, we are making our voices heard across the nation that we want the FHA to put a halt to DASP until it can change to meet its mission.”

Despite the increased scrutiny that Lone Star Funds may be under, the firm plans to grow its mortgage portfolio and provide a healthy return for its investors.

After about $200 million worth of loans have been made, the debt will be packaged into bonds and sold, with the new fund — Lone Star Residential Mortgage Fund I — retaining the riskiest pieces, according to the materials. The company expects to provide investors gross returns of 15% after three years.

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