09/07/2012

York Pushing to Prop Up Ailing Arch Bay

York Capital is on a mission to turn around its Arch Bay Capital unit, a flagging mortgage-investment shop that has been weighing on the returns of one of the firm’s hedge funds.

York Distressed Mortgage Fund lost about $1.7 million in the second quarter — amounting to 2.3% of invested capital — according to a letter distributed to investors this week. It is one of two vehicles York uses to capitalize Arch Bay, which buys dented home loans with an eye toward rehabilitating the credits or foreclosing on the properties. The other vehicle, the $3.9 billion York Credit Opportunities Fund, lost 1.7% last year but has since bounced back, posting an 8.4% year-to-date return as of July 31.

In the letter to backers of the distressed-mortgage fund, York executives Daniel Schwartz and William Vrattos blamed the second-quarter loss largely on the sale of several hundred foreclosed properties Arch Bay acquired via loan purchases in 2008 and 2009. Those investments generated an 8.9% loss on a gross basis.

Arch Bay also wrote down the value of its portfolio of 4,385 mostly nonperforming mortgages. The Irvine, Calif., firm’s efforts to dispose of some of those loans via foreclosure has been slowed by administrative roadblocks in so-called judicial states requiring court approval for such actions — particularly Illinois, New Jersey and New York. “Tax and insurance advances must be paid on a regular basis in order to prevent the local municipality from placing a lien on the property,” the letter said. “The advance costs have been higher than expected due to the extension of foreclosure timelines.”

To stem the losses, a new Arch Bay management team installed by York is working to refine its liquidation strategies. Among other steps, Arch Bay has begun aggressively pursuing loan modifications and short sales in Florida, Illinois, New Jersey and New York — including a “door-knocking campaign” aimed at deeply delinquent borrowers. At the same time, the firm is taking steps to unload older-vintage foreclosed properties via bulk sales. Arch Bay also is pushing to build up its portfolio of performing mortgages, and recently allocated $250 million to enhance its mortgage-servicing capabilities.

York purchased a majority stake in Arch Bay during the financial crisis in an effort to profit from the collapse of the subprime-mortgage market. But signs of management’s frustration with the business have been evident for some time. Last year, York tried to sell Arch Bay, but found no takers. Earlier this year, the parent ousted Arch Bay chief executive Shawn Miller and chief investment officer Steven Davis.

In their place, York promoted Claudio Chaves to chief executive, Robert Mattesky to chief investment officer and Lisa Jack to chief financial officer. At the same time, a top York executive, Wyatt Wachtel, was transferred to Irvine to oversee the turnaround efforts.

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