SUPERNEWS

Macro

Deer Park Eyes $170M in Mortgages, Predicts Rate Cuts

Deer Park raises $170M for mortgage fund, betting on Fed rate cuts and a real estate market revival.

By Max Weldon

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5/10, 06:59 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Blackstone Inc.
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Key Takeaway

  • Deer Park Road Management bets on residential mortgage market, raising $170 million for a new fund, expecting Fed rate cuts.
  • The fund targets legacy mortgages pre-2007, offering a 12% hurdle rate with optimism in real estate's revival and lower risk.
  • Plans to launch a commercial mortgage-backed securities (CMBS) fund targeting $250 million, reflecting confidence in the sector's rebound.

Mortgage Market Optimism

Deer Park Road Management Co. is gearing up to invest in the residential mortgage market, anticipating rate cuts by the US Federal Reserve later this year. The firm has raised $170 million for its debut mortgage opportunity fund, targeting legacy residential mortgage-backed securities from 2007 and earlier. Chief Investment Officer Scott Burg highlighted the significant equity in these homes, suggesting minimized risk and potential for return growth in a declining rate environment. The fund aims to close with around $200 million of commitments, offering a 12% hurdle rate with a three-year lock-in period.

Real Estate Revival Predictions

The anticipation of a real estate market revival is not limited to Deer Park, with major investors like Blackstone Inc.'s President Jon Gray indicating a bottoming of values and opportunities to buy discounted assets. The US has seen a 170% increase in the purchase of commercial mortgage-backed securities this year, signaling renewed investor interest. Deer Park plans to launch a fund focusing on commercial mortgage loans, targeting up to $250 million with an 8% hurdle rate, doubling down on its conviction for a market rebound.

Rate Cut Speculations and Market Reactions

The market's expectations for Federal Reserve rate cuts have seen significant fluctuations, with an additional percentage point of rate cuts anticipated by the end of 2024, only to be reset in the following months. This recalibration led to the S&P 500 posting its first decline in April in six months. David Zervos criticized the consensus forecasters for their inaccurate predictions, emphasizing that the market overreaction was not the Fed's fault but rather a misjudgment by the market itself. Meanwhile, Blackstone's Jon Gray suggests that economic growth will slow due to stubborn inflation, affecting the Fed's timeline for rate cuts.

Management Quotes

  • Scott Burg, Chief Investment Officer of Deer Park Road Management Co.:

    "There’s a significant amount of equity in these homes, so the risk in these assets is minimized versus the potential returns growth, particularly in a declining rate environment." "We see investors moving quickly to take advantage of the opportunities and dislocation in real estate." "We’re now long-only ahead of expectations that the Fed will lower rates later this year."