Fortress Affiliate Sees Deals in Subprime Mortgages

March 19, 2007, 12:35 pm

While the troubled subprime mortgage market has weighed down on Wall Street — Bear Stearns and Lehman Brothers both reported that their 1st-quarter revenues were hurt by the sector — others see a buying opportunity. Buyers like Goldman Sachs have said that they see a chance to acquire those assets cheaply, anticipating a rebound, rather than a continued implosion.

Now, it seems that Fortress Investment Group is on that list. TheStreet.com points out that an $8.6 billion Fortress affiliate, Newcastle Investment, announced on Friday that it will acquire a $1.7 billion portfolio of subprime mortgages from an unnamed seller.

In its statement, Newcastle said that the residential mortgages are scattered throughout the United States, with about 28 percent in California, 13 percent in Florida and 10 percent in New York. About 74 percent are adjustable-rate morgages, and most of those have a fixed rate for two to three years. The current weighted average credit score of the borrowers is 644, out of a possible 850.

Kenneth M. Riis, Newcastle’s chief executive, expressed confidence that his firm knows how to avoid the sort of blowups that have plagued the Wall Street firms like Goldman and Morgan Stanley. Both firms opened significant lines of credit to New Century Financial, a onetime darling of the industry that is now fighting to stave off bankruptcy.

“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,” Mr. Riis said in a statement. “We underwritten this investment to generate an attractive return on capital using conservative default and loss assumptions.”

Newcastle’s deal may show that Fortress thinks the worst of the subprime mortgage troubles over. A publicly held REIT, Newcastle is managed by an affiliate of Fortress (and is considered one of the $10.7 billion hedge fund’s “castles”). Newcastle’s chairman is Wesley R. Edens, who is also the cofounder, chairman and chief executive of Fortress. Until last month, Mr. Edens also served as Newcastle’s C.E.O.