Trouble Paying the Mortgage? Careful, Hedge Fund Investors Want to Change Your Locks

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Further evidence that we live in very strange times: Portfolio.com links to a report that a group of hedge fund managers are angry that big banks and lenders are helping homeowners avoid foreclosure. Seems the hedge funds placed bets under which they would benefit if bonds backed by subprime mortgages take a hit. And if the banks help the homeowners avoid foreclosure, they’re preventing the hedge funds from cashing in those bets.

From Portfolio.com: ‘According to a report in the Financial Times, a group of 25 hedge funds has asked the International Swaps and Derivatives Association to tell the banks to stop helping the poorest homeowners avoid foreclosure. Of course, the hedge funds don’t quite put it in those terms. Instead, they suggest that the banks are engaging in ‘market manipulation.’

More: ‘Some hedge funds invest in derivatives contracts that pay investors when bonds backed by subprime mortgage loans take a hit. Since the $1.2 trillion subprime mortgage bond market has had a rough ride of late, the hedge funds that invested in these derivatives have profited handsomely. The more defaults, the better.’

‘The funds’ beef is that the same banks that sell these derivatives can decide to give the homeowners a break on their monthly payments instead of defaulting. The funds say the banks can avoid paying out on the derivatives contracts by lending a hand to the borrowers.’

Photo Credit: LATimes