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Big Money Bets on a Housing Rebound

DAVID N. MILLER, a master of bailouts, steps to the dais and coolly explains how the financial world went crazy.

It is February 2010. The anger behind Occupy Wall Street is building. Flicking through slides, Mr. Miller, a Treasury official working with the department’s $700 billion Troubled Asset Relief Program, lays out what caused the housing bubble: easy credit, shoddy banking, feeble regulation, and on and on.

“History has demonstrated that the financial system over all — not every piece of it, but over all — is a force for good, even if it goes off track from time to time,” Mr. Miller tells a symposium at Columbia University in remarks posted on YouTube. “As we’ve experienced, sometimes this system breaks down.”

But, it turns out, sometimes when the system breaks down, there is money to be made.

Mr. Miller, who arrived at the Treasury after working at Goldman Sachs, described himself as a “recovering banker” in the video.

Today, he has slipped back through the revolving door between Washington and Wall Street. This time, he has gone the other way, in a new company, Silver Bay Realty, which is about to go public. He is back in the investment game and out to make money with a play that was at the center of the financial crisis: American housing.

As the foreclosure crisis grinds on, knowledgeable, cash-rich investors are doing something that still gives many ordinary Americans pause: they are leaping headlong into the housing market. And not just into tricky mortgage investments, collateralized this or securitized that, but actual houses.

A flurry of private-equity giants and hedge funds have spent billions of dollars to buy thousands of foreclosed single-family homes. They are purchasing them on the cheap through bank auctions, multiple listing services, short sales and bulk purchases from local investors in need of cash, with plans to fix up the properties, rent them out and watch their values soar as the industry rebounds. They have raised as much as $8 billion to invest, according to Jade Rahmani, an analyst at Keefe Bruyette & Woods.

The Blackstone Group, the New York private-equity firm run by Stephen A. Schwarzman, has spent more than $1 billion to buy 6,500 single-family homes so far this year. The Colony Capital Group, headed by the Los Angeles billionaire Thomas J. Barrack Jr., has bought 4,000.

Perhaps no investment company is staking more on this strategy, and asking stock-market investors to do the same, than the one Mr. Miller is involved with, Silver Bay Realty Trust of Minnetonka, Minn. Silver Bay is the brainchild of Two Harbors Investment, a publicly traded mortgage real estate investment trust that invests in securities backed by home mortgages.

In January, Two Harbors branched out into buying actual homes and placed them in a unit called Silver Bay. It offered few details at the time, leaving analysts guessing about where it was headed.

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Credit...Tim Robinson

“They were not very forthcoming,” says Merrill Ross, an analyst at Wunderlich Securities. As of Dec. 4, Two Harbors had acquired 2,200 houses. Ms. Ross says she couldn’t find out how much Two Harbors paid or the rents it was charging. Two Harbors shares, which recently traded at $11.66, are up about 25 percent in 2012.

Two Harbors now plans to spin off Silver Bay into a separately traded public REIT. The new company will combine Silver Bay’s portfolio with Provident Real Estate Advisors’ 880-property portfolio. Silver Bay will focus on homes in Arizona, California, Florida, Georgia, North Carolina and Nevada, states where prices fell hard when the bottom dropped out.

In a filing with the Securities and Exchange Commission last week, Silver Bay said it planned to offer 13.25 million shares at an initial price of $18 to $20 a share. But it’s no slam dunk. While home prices nationwide have begun to recover — they were up 6.3 percent in October, according to a report last week from CoreLogic, a data analysis firm — prices could fall again if the economy falters anew. Millions of Americans are still struggling to hold onto their homes and avoid foreclosure.

“Recent turbulence in U.S. housing and mortgage markets has created a unique opportunity,” Silver Bay said in an S.E.C. filing. The company, which will be the first publicly traded REIT to invest solely in single-family rental homes, says its investment plan will help clear foreclosed homes from the market, spruce up neighborhoods and renovate vacant homes, presumably while enriching its new shareholders. Its portfolio will be managed by Pine River Capital Management, a hedge fund in Minnetonka that has reportedly been buying bonds backed by risky subprime mortgages. Mr. Miller is a managing director at Pine River and chief executive of Silver Bay.

Mr. Miller, through a spokesman, declined to comment for this article, citing the pending stock offering.

Some real estate experts question Silver Bay’s long-term prospects. And they wonder if the moment to plow into the housing market has already passed. The hedge fund manager Och-Ziff Capital, for example, is already starting to sell the single-family homes it bought since the recession began.

“This will be a workable business as a REIT for at least three to five years,” says Jay Leupp, a managing director at Lazard Asset Management. If the economy perks up and renters start buying, he said, “it may make more sense to liquidate the portfolio and transition into another business or simply return the cash to shareholders.”

MR. BARRACK just bought a modest house in Inglewood, Calif. And another in Santa Clarita. And another in Sacramento. These are among thousands of foreclosed properties that his private investment company, Colony, has snapped up nationwide — not for a quick flip, but to rent.

One property, a four-bedroom home bought in Sacramento for $167,500, was worth $436,000 before the recession. Such deals aren’t Mr. Barrack’s usual style. Colony’s financial appetite normally runs a bit more toward, say, Michael Jackson’s Neverland Valley Ranch, whose estimated value was about $47 million when Mr. Barrack bought it in 2008 at a discount as it was headed for foreclosure.

Investors like Mr. Barrack’s Colony are a rising force in the housing market. Even if their purchases slow, they are now sitting on thousands of homes and have positioned themselves as the new landlords of thousands of Americans.

Now Mr. Miller, 36, has arrived on the scene. At the Treasury, Mr. Miller helped oversee the federal bailouts of banks whose risky mortgage businesses helped send the economy and housing market into a tailspin. Now, as Silver Bay’s chief executive, he is trying to pick up family homes on the cheap.

James H. Lambright, who preceded Mr. Miller as the chief investment officer of TARP and who is the former chairman of the Export-Import Bank of the United States, says Mr. Miller did a great job at the Treasury.

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David Miller, a former Treasury official who is now in private industry, is trying to buy up family homes cheaply.Credit...Drew Angerer/The New York Times

He says he was impressed by Mr. Miller’s financial knowledge and his commitment to public service. Among other things, Mr. Miller helped place values on mortgage securities.

“This provided him an opportunity to develop a deep understanding of the housing finance markets,” says Mr. Lambright, 41, now the chief financial officer of Sapphire Energy, a renewable-energy company in San Diego that produces oil from algae.

Mr. Lambright recalls how Mr. Miller, shuttling between Washington and his home in the New York area, navigated complex questions, like how the government would guarantee many millions of dollars in assets held by Citigroup.

“I would find him on conference calls at 3 in the morning, dealing with lawyers, trying to untangle really complicated details,” Mr. Lambright recalls. No one on the TARP team had time for a social life. “Socializing in late 2008 and early 2009 meant grabbing a cup of coffee in the Treasury cafeteria,” he says.

The crisis passed, but since September 2008, an estimated 3.9 million families have lost their homes to foreclosure. Nationwide, home prices have plunged by about a third from their peak in 2006. Some markets, like Las Vegas, are down more than 60 percent, according to Green Street Advisors, a real estate research firm in Newport Beach, Calif.

All of this is good news for someone with money looking to buy homes.

Demand for single-family home rentals has always been there: it represents 33 percent of home rentals, according to Green Street. Until now, though, most rentals were handled by small-time landlord-entrepreneurs who owned five or 10 houses, says Bob Curran, a managing director at Fitch Ratings.

INDUSTRY experts say the potential profits are enormous. They compare the current home market to the commercial real estate market after the savings and loan bust of the late 1980s and early 1990s. Back then, early investors realized double-digit — and in some cases triple-digit — returns. Still, some question how long — and how far — these big investors can ride the market this time.

Nevertheless, Colony, the private-equity firm Kohlberg Kravis Roberts and others have expressed interest in following Silver Bay’s lead in taking home investment entities public. The pros are offering mom and pop a slice of the action — a development that has often been a sign that the big money has already been made.

Silver Bay’s financial future will ultimately depend on how much it pays for homes, repairs and maintenance, as well as its ability to lease those homes and for how much. Dealing with hundreds or thousands of individual homes across various states is different from dealing with, say, apartment buildings in one area. Valuations are tricky.

Colony, for example, recently sent 50 people to bid on foreclosed properties at auctions in eight counties in the Atlanta area to ensure that the homes were carefully assessed, recalls Justin Chang, acting chief executive of Colony American Homes, a division of Colony Capital. “You can’t sit in your office underwriting on your computer — you can’t dial it in,” he says. “You need local men and women who really know those markets.”

Investors who don’t do their homework may see the values of their investments plummet, much the way people lost big on mortgage investments in 2008. Maintenance expenses are one wild card. Another is whether people who rent single-family homes — some of whom lost houses to foreclosure — will be able to keep up the rent.

Most of all, the American dream of homeownership burns.

“People want to own, and when the opportunity comes back for people to be able to buy their own homes, they will,” says Richard Anderson, managing director at BMO Capital Markets. “Let’s not forget — the American dream is not to rent a home. It’s to own a home. And that’s not changing anytime soon.”

A version of this article appears in print on  , Section BU, Page 1 of the New York edition with the headline: Big Money Bets on a Housing Rebound. Order Reprints | Today’s Paper | Subscribe

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