06/03/2011

Lone Star to Securitize Seasoned Mortgages

Lone Star Funds plans to securitize about $400 million of seasoned floating-rate commercial mortgages this summer via J.P. Morgan.

The Dallas fund shop actively buys whole loans in the secondary market at a discount. Market pros said the loans backing the commercial MBS deal are performing, but may “have some hair on them” — meaning that the loan-to-value ratios could be higher than usual, and debt-service-coverage ratios could be lower.

Most of the mortgages were originated three to four years ago, and the majority have relatively small balances, according to market players, who added that Lone Star is likely using the CMBS transaction to finance its investment in the loans. Lone Star and J.P. Morgan declined to comment.

Lone Star is one of the nation’s biggest fund operators. It is currently investing its second distressed-debt fund, Lone Star Real Estate Fund 2. The company has raised at least $1.7 billion of equity for the vehicle.

The buzz is that other loan investors are also mulling securitizations because tighter spreads in the reviving sector are making such transactions economically feasible.

J.P. Morgan itself might consider such a strategy for a $3.5 billion portfolio that it acquired from Citigroup last August.

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