Lone Star thinks it's got a prime choice

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KAI RYSSDAL: Subprime mortgage lenders might well be the next hot buyout target. Today, we learned the private equity firm Lone Star Funds will pay 400 million cash for Accredited Home Lenders. That's a nice premium to Accredited's closing stock price Friday, though it's a ways off the pre-subprime meltdown high.

Lone Star's not the only buyout gang throwing money at subprime's corporate wreckage, as Marketplace's Steve Tripoli reports.


STEVE TRIPOLI: Private equity firms and hedge funds are tossing around money all over the subprime world. And with subprime lenders' stocks depressed by tanking portfolios, the prices look nice.

But analyst Bose George at Keefe, Bruyette & Woods says buyers are assuming things can't get worse.

BOSE GEORGE: Baked into the assumption are certain views on how the mortgage market stabilizes and where the bottom is. And from our perspective, it's a little hard to really call that bottom yet.

Jeff Kirsch buys defaulted mortgages at American Residential Equities in Miami. He thinks there's still trouble to come in subprime.

JEFF KIRSCH: I see further contraction. I see legislation. I see more defaults. So I'm just not optimistic about the mortgage business and certainly don't believe that it's a growth business over the near-term.

But his key words there are "near-term." Kirsch says the buyout artists hope to cash in further out. Like the depressed condo market in his Miami base, prices are down in subprime, inventory's plentiful.

KIRSCH: Yet, there are private equity and hedge funds that are interested in buying huge blocks. So over the short-term you'd say, "Well, that doesn't make any sense." But if you take a more European/Asian view towards real estate you'd say, "Well maybe, if you look at it over a 10 or 20-year period, it does make sense."

There's one other worry from this buyout trend that rescuing subprime lenders may also resurrect their reckless lending habits.

Analyst Bose George says don't worry. The original lenders were big risk-takers looking for a fast fortune. The new guys like money too, but they're willing to build profits a little more slowly and safely.

I'm Steve Tripoli for Marketplace.

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