LibreMax's Lippmann Pushes To Cut Mortgage Balances

Nov 7 2011 | 1:17pm ET

Proponents of mortgage-debt forgiveness have a new backer: Hedge fund manager Greg Lippmann.

Lippmann, who made his name at Deutsche Bank betting against subprime mortgages, told investors in his LibreMax Capital that the majority of mortgage modifications are missing the mark, Bloomberg News reports.

"Principal reductions are necessary to help ameliorate the housing crisis," Lippmann told LibreMax clients in an Oct. 31 letter. Lippmann added that "prominent economists from both the left and the right" back cutting mortgage balances, and noted that mortgage modifications that don't cut principal—such as those that only reduce interest rates—actually make borrowers 1.7 times more likely to default.

Less than 6% of mortgage renegotiations in the second quarter included principal reductions, and more than 10 million defaults could occur without them.

Lippmann isn't alone among hedge fund managers calling for principal reductions. Metacapital Management's Deepak Narula last month wrote that principal reductions "would go a long way towards ending the large overhang on the housing market of foreclosed homes, which would otherwise take several years to clear."

Lest one think that Lippmann's push is entirely altruistic, LibreMax has invested in mortgage-backed securities that would benefit from principal reductions. But Lippmann did says that he's built a portfolio "reasonably insulated with regard to different modification outcomes."


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