Waterfall Back in Capital-Raising Mode

Waterfall Asset Management is pushing to raise another $600 million for a hedge fund that buys nonperforming home loans, rehabilitates them and then securitizes some of the credits.

The New York firm, headed by securitization veterans Tom Capasse and Jack Ross, currently manages about $400 million via the Waterfall Victoria Fund. Capasse and Ross plan to kick off a marketing campaign around the start of the new year with the goal of reaching $1 billion within 12-18 months.

Waterfall launched the fund in July 2007 with backing from investment manager M.D. Sass and Macquarie Group, but purposely avoided aggressive marketing efforts in the following years. That's because the firm was concerned about a "double-dip" recession and the end of a federal tax-credit program for new home buyers, which expired April 30.

The thinking now is that the housing market finally has hit bottom and will soon begin a slow recovery. The firm hopes to expand its buying activity while there's still ample supply of distressed mortgages, then work with borrowers amid a gradual improvement in home values.

Waterfall is among a handful of mortgage-rehab specialists, including Arch Bay Capital and Selene Investment, that are eager to buy more loans. Selene, a New York firm headed by mortgage-backed securities pioneer Lewis Ranieri, has raised at least $250 million for a closed-end fund that expects to hold a first equity close later this month (see article on Page 5).

Firms like Selene and Waterfall specialize in buying distressed home loans at steep discounts, then working with borrowers to reduce their principal balances and get them to resume payments. Some of the firms employ a "buy-and-hold" strategy, while others seek to sell or securitize the rehabilitated mortgages.

Waterfall takes the latter approach. On June 1, Waterfall Victoria Fund sold $50 million of mortgage-backed securities, with Bank of America and Citigroup running the books. The firm expects to conduct a follow-up offering as early as January, with the idea of using the proceeds to fund additional buying activity.

Capasse and Ross previously co-headed Merrill Lynch's asset-backed securities group. They launched Waterfall with a seed investment from M.D. Sass-Macquarie Financial Strategies Fund, which provides financial backing and operational support to hedge funds, private equity vehicles and real estate-investment funds.

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