Did Kyle Bass Turn Bullish On Housing, And Does It Mean Substantial Upside For Mortgage Insurers?

Tyler Durden's picture

For some actually relevant news, instead of market kneejerk reaction comments, we turn to the WSJ, whose Nick Timiraos points out an important inflection point, namely that Kyle Bass, one of the best hedge fund managers of his generations, may have turned moderately bullish on housing. To wit "A closely followed hedge fund manager known for correctly betting on the housing market’s collapse four years ago purchased a small stake in the nation’s largest mortgage insurance company in a bet that the housing market has neared bottom. J. Kyle Bass, portfolio manager at Dallas-based Hayman Capital Management LP, bought the 4.9% stake in MGIC Investment Corp, according to federal filings. He said on Monday the bet reflected his view that the housing market’s losses had largely been absorbed. “You can see that the pig has moved through the python in terms of U.S. housing losses,” he said. Shares of MGIC are about 10.2% higher in Monday afternoon trading, to $2.82." The Heyman Capital filing can be found here.

More from WSJ:

Unlike PMI, he said MGIC has a “pretty big positive equity position,” and he said its shares could rise above Monday’s opening price of $2.58 per share even if the firm is forced by regulators to stop writing new policies. “We think they’ll be one of … the last ones standing,” he said. “We’re in it for the long haul.”


Mr. Bass said his fund would have bought a bigger stake if doing so wouldn’t trigger a provision that would have limited a tax benefit for MGIC.


Fannie Mae and Freddie Mac require loans with less than 20% down payments to have some type of credit enhancement, typically mortgage insurance. When homes are sold through foreclosure, the insurer takes the first loss.

Keep in mind that unlike other amateur "hedge fund managers" who run a few million in family money and boast proudly about their holdings only to set the market rip against them and force them to sell and/or cover as soon as their sell stops are hit, Kyle Bass is a wily one, and we wouldn't put it past him to actually think two or three moves past the 13G clone sheep brigade. That said, we have previously noted our own personal appreciation of monolines, such as in this case MBIA, which stands poised to reap substantial windfalls as their litigation against Bank of America and other firms gather steams with each passing day, although granted the comparison is not a simple apples to apples. That said, we believe that if Kyle Bass is loading up on MGIC, he likely is also looking at MBIA, where it would be quite easy, as noted previously, to force a short squeeze due to the already discussed ratio of short interest to institutional ownership, where one major holder could easily force a massive short squeeze if so inclined following pulling of the borrow.

Lastly, there is also the explanation that just like John Paulson, Kyle Bass is simply mortal, and is simply betting on a housing recovery... a little early.

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devo's picture

This guy is about 3 to 5 years early. There's at least another 25% drop.

bdc63's picture

"Loses in the housing industry have largely been absorbed"

That the most ridiculous thing I've read all day, & given today's headlines, THAT's saying something

Devo is right -- 3 to 5 years till we see a bottom

Popo's picture

Betting on mortgage insurers is not the same as being bullish on housing anyway. The whole premise of this article Is based on a flawed understanding of Bass' call.

topcallingtroll's picture

I didnt see it that way.
First the mortgage defaults have to peak. Bass thinks that is behind us now. Then housing itself starts going up, whether thru qe or inflation or pure demand.

It may be years before we see an actual upturn in housing prices, but a lot of oldtimers who buy houses for rental income think now is a great time to buy in certain areas.

There are some amazing cash deals being made by those accustomed to haggling.

bdc63's picture

As long as we continue to hear that people have stopped making mortgage payments and have been living in their houses for free for a year or two because the banks don't want to add to their foreclosed inventory, then mortgage defaults have not "peaked".

Pladizow's picture

Every time Bass speaks, I attentively listen - but something seems off here?????

What happens to ARM's in a high unemployment environment, when rates inevitably start to rise?

Troll Magnet's picture

+1 to TopCallingTroll.

I'm personally looking to invest in a commercial property right now.  I'm not sure if housing market will recover but there are some really good deals on rental properties. 

LowProfile's picture

Bass was ~3 years early on the housing bubble bursting.


Ropingdown's picture

Bass is shrewd enough to see the benefits that may flow to the insurers both from litigation and, more valuably, from the government-subsidized refinancings of insured loans which may well (given current DC talk) involve principal reductions of some amount.  If these later occur it will be very good for MGIC.

TruthInSunshine's picture

First, and significantly, Kyle Bass's actions are being very possibly grossly misinterpreted; is he really betting that the housing market has hit bottom, or is he really just expecting a wave of refinancings? A whole lot can be said about what "housing market losses have been mainly absorbed" (by whom? The government? The banks? The taxpayers or GSEs? How?) really means, from what specific and technical take that statement is being made, etc.

On to the broader picture...

There is an estimated 18 million vacant residential dwellings in the U.S., NOT including homes occupied by people not paying their mortgages or delinquent in paying their mortgages.

18.4 Million Vacant Homes in the U.S.A.

There will be an estimated 1.9 to 2.1 million homes foreclosed on for FY 2011, and an increase of about 20% in foreclosures in 2013.

Even if one assumed that 25% of the 18 million vacant homes referenced above, not including pending foreclosures or future foreclosures, are not habitable, that still leaves about 13.5 million vacant residential dwellings.

Hell, assume that there's a fudge factor of 30% in the 18 million vacant home estimate, and by the time you do the 25% reduction, you're still around 10 million vacant, habitable homes, not including FY 2011 foreclosures or those that will surge in 2012.

What about 2013, 2014, etc?

Are the job market and unemployement/underemployment rates really improving? Are real wages rising or falling, on average? What's happening with the cost of living?

Why are property values STILL falling?


It's all about jobs and wages and purchasing power (in that order).

Anyone, whether Kyle Bass or whomever, that sticks their hands out now trying catch a falling knife of the housing market is going to get cut.

When the unemployment rate/underemployment rate goes down because there's real net job creation again, and when wages and benefits rise (or at least keep pace with the pace of REAL inflation - and not the BLS' BS measurement), then there will be a rational thesis that can be made that the housing market is going to turn the corner.

Until then, anyone making such bets is buying a scratch lottery ticket.


Killer the Buzzard's picture


I completely agree with you analysis of the resi real estate market above, however bear in mind that MGIC effectively stopped wrapping RMBS deals back in 2007.  The securitizations they insured contained mortgages which are 4 years along their "loss seasoning" curve in other words, and have already taken a large bulk of the impairments which they're ever likely to experience.

Having said all that, MGIC had (has) a pretty robust business of insuring muni debt.  That business hasn't hit the fan in earnest yet. 

I respect Bass, but I'm puzzed that he considers an investment in MGIC the best use of his capital.

sqz's picture


Making a bet on one robust outlier mortage insurer is not the same as a bet on housing.

Anyone who thinks that

1. the consumer spending on housing from 2000 to 2007 was in anyway historically normal

2. that we are likely to see a return to those levels

3. that we will get there without either real job creation, increase in household income or mortgage debt writedown

is living in cloud cuckoo land.

Of course, there's always the nuclear option: remove the debt ceiling and let fiscal policy, helped by the TBTF liquidity goblins, blow pretty asset bubbles all over again for the umpteenth time. But that's why on ZH we prepare ...

Jay Gould Esq.'s picture

Kyle Bass.

Same chap who bought a pallet of rolled nickels, right ?

Enough said.

palmereldritch's picture

Kyle should probably be more concerned that with that particular market, he's facing a potential false bottom and that perhaps a whole different sub-basement awaits...


piceridu's picture


There are only 3 impetuses for housing in the USA:



              1. Employment...Employent? Get real, rising wages are nonexistent and there's high unemployment - fail

           2. Expanding and available easy credit...expanding credit? Try and go out and get a re-fi or a new home loan - fail

           3. A real secondary mortgage market...secondary market? The government is virtually the only game in town...there's bankrupt Fannie and Freddie & FHA - fail

 You need all 3 to create any significant dent in the souring housing market.

0 for 3 = no rebound for housing...simply look at the facts


pavman's picture

Why are property values STILL falling?

Because the rent is still too dam high!  Oh wait, I meant to say because the prices are still too dam high!  Actually, if you add in property tax, association fees, move-in tax, and PMI, its not worth owning unless uber-duber inflation is right around the corner (which would be hard to believe considering the Euro crisis and the calm in the center of the storm we find ourselves in atm).  If Benny and the Jets turn on full steam, then it might be worth it; however, I prefer portable wealth myself in situations where we re-live history and invite totalitarian crackpots into our world.

Too many places are still WAY over-priced.  Once you factor in the things mentioned above, you have got to get a helluva-lot lower to make it worth switching from renting to buying.  Unless its an investment property with immediate cashflow, then it might be worth it. 

Its true though, in rural areas housing is a steal right now.  I heard about property in decently populated areas of Nebraska going for unbelievable prices.  But in more urban and suburban areas, I'm not seeing price deflation on par with my expectations.  And that is where I would buy.  Slowly I'm seeing better deals than a year or two ago, but those are oddball properties that are either not sellable in the future, or need a ton of work.

Seeing as the Boomers (who can't seem to go out without destroying the economy, those selfish pigs) are about to retire enmass, I don't really see how the housing situation can turn around until that all plays out...2020, maybe 2022 when the Gen Y people are old enough to start buying shit (or is that the Gen Z children coming of age right now?!).

Anyway, negative population = bad for housing (and may even = bad for economy).  And we're going to be entering that territory unless we start importing more folks.  Plus, if this is playing out historically, we're just in the inflation caused deflationary death spiral, and its just the warm-up before the real pain.

DarkestPhoenix's picture

I'm not an old-timer (only 33)....but I have picked up four foreclosures on the super-cheap with cash, and every single one of them is giving me almost a 20% yearly return just with rents.  However, even I stopped buying, because I think in time, we'll see this price drop even lower, so for now, I'm focused on building the PM portfolio.  I will not be satisfied until I can buy a property just by dumping some silver on the table.  First foreclosure I bought was a two-bedroom for $20,000 cash, put just under $11,000 into it to fix it up and I'm renting it out for $575 a month, and could probably get $600, if I were greedy.  I live in Iowa, and even though we weren't "hit" that terribly by the crisis, our prices were pretty low to begin with.  Some of these places are just unbelievable bargains, though....hard to resist and just throw all your money into gold and silver, but....on the other hand, it's shiny.

sunnydays's picture

Correct we are not close to the bottom.  Look at the huge increase of foreclosure filings the last few months.  There is more hidden house inventory than anyone even knows.  

narnia's picture

international flows are a wild card.  if the $ gets cheap enough, and international buyers don't fear issues with property ownership rights, this sector could get active on the investment front.  

prices have to come down DRAMATICALLY before organic demand fuels this.

ArkansasAngie's picture

Insovency vs. Liquidity.

When you buy based upon price appreciation and not economic value ... well ... price discovery has not run its course.  Too much extend and pretend for that.

He's betting on Benny's printing press making all those negatives go green

I hope he is(n't) holding his breath.

topcallingtroll's picture

Hey babe,

Isnt he just thinking that delinquencies have peaked?
Are there good deals available in your perennially over priced area?

ArkansasAngie's picture

I don't think they have peaked.

Banks are still extending and pretending.

I've bought some nice foreclosures

Right now I'm looking into purchasing notes on properties for pennies on the dollar

WestVillageIdiot's picture

That is on top of the 30 - 50 percent drop that many areas have seen.  The negative wealth effect makes housing even more unstable, on top of a slew of other reasons.  I am finally hearing people talk about how real estate might not be the surest path to riches.  When I hear the great mass of proles repeat this line of reasoning then I will know housing is a good deal.  Plenty of potholes ahead and that road to Appreciation. 

devo's picture

What appreciation? The average home is a depreciating asset. The best you can hope for is it keeps up with inflation, which means a break even. The fed and realtors expect a return to the bubble prices...to them that means housing has "corrected"...lol

riphowardkatz's picture

DEVOid your argument is very compelling. Housing wont go up because I say so. OK you win. Ignore the fact rents are higher than 30 year in lots of places, foreclosures are predominantly in new crappy developments not established hoods, housing very cheap in gold terms, 3x money supply, mortgage is a dollar short, tons of incentive to create another housing bubble which can be done with ease (push rates to 1-2% they are working on this should be done by spring of next year, very few places to store wealth besides precious metals and only place to store wealth that has opportunity for income and or pracitical use. 





devo's picture

It sounds like you own a home. See, I don't, and I can buy one in cash, so I don't have any bias.

Housing is actually expensive in gold terms. So are stocks. In terms of gold, the Dow should be at 8,700.

I didn't say housing is a terrible investment. I just think it will go 25% lower. If you can buy outright (at 20% off list) and rent it out, it's probably an okay investment in this environment. I would worry about stagflation and depreciating rents, though.

T1000's picture

Great points, Devo.

I can see the value in real estate, but it won't be for the homes, it will be for the land under the homes, where they'll bulldoze and scrape these worthless homes off the land to grow something with real value, food. 

Homes are luxury items, and broke, jobless, and former members of the middle class aren't getting back in da club For a loooooong time.

Tent houses, bitches!



Temporalist's picture

Motor homes are cheap.  Buy a plot of land, drop a trailer park on it, VOILA, private community...exclusive to anyone who can pay.

ghostfaceinvestah's picture

Even without a further drop, the underwater mortgages already out there will generate enough losses to swamp the remaining mortgage insurers.

ATM's picture

Or perhaps the mortgage insurers will get bailed out because the banks can't take the losses and we know the investors aren't going to take the losses either because they're union pension funds.

ghostfaceinvestah's picture

The counterparties with the biggest exposure to the mortgage insurers are fannie and freddie.  The failure of PMI and the regulators decision to only pay 50 cents of every claim dollar was a direct contributor to Freddie's recent $6B loss.

And of course that $6B loss is funded by the taxpayer.

That is the only bailout the mortgage insurers will get - taxpayers will cover their claims when they can't.

There will be nothing for the stupid equity investors like Kyle Bass.

Larry Darrell's picture

I don't necessarily disagree;  however......

Charting housing against gold, real estate is at a multi-decade low.

Maybe he is easing his way in due to looking at the picture when not priced in nominal dollar terms?

As the article says, it's not like he's placing a large bet at this time.


SRSrocco's picture

devo...you're exactly right.  There's at least another 25-50% decline in home values to come.  If we consider the falling EROI (energy returned on invested) and the Land Export Model that shows exports of oil will decline drastically over the next decade... the Suburban Retail Leech and Spend Economy will not be viable at this time. 

Furthermore, a great deal of real estate will be disfuctional due to the fact energy will become both scare and expensive rendering the suburban economy...NULL and VOID a few years in the future.

I do not mean to be so pessimistic...but thats what the facts say.  Best to be out of the big cities when the Cow Excrement hits the Wind Turbine.

GeneMarchbanks's picture

Furthermore, a great deal of real estate will be disfuctional due to the fact energy will become both scare and expensive rendering the suburban economy...NULL and VOID a few years in the future.

Your premise makes me believe you're a peak oiler, which is fine but the next move in oil could take us to $200 and the US would still have cheaper petrol than... say GB or all of the EU area. Drive on 'Merikans... you have no choice anyway unless you're in Frisco etc.

It'll only mean a few more rubber bullets @OWS...


chubbar's picture

I'm not of the opinion that RE will do well, I think it continues to decline as do you.

That being said, don't forget there is a fair amount of spent energy existing in the houses that are already built. Should energy inputs take off in cost, existing homes offer sanctuary to some degree.

BTW, if the suburbs are "null and void" and it is "best to be out of the big cities", what do you suggest for the population?

GeneMarchbanks's picture

Well... I can't speak for him but surely you can imagine the alternative: rural farming type land with an agrarian bend, think Jefferson's utopia.

chubbar's picture

Well, I guess I assumed you realized I was speaking about all the folks currently in both the suburbs and/or the cities. I live close to a small town and own cattle, chickens and a greenhouse on 40 acres, essentially I "got it" back in 03 when I went almost all in on PMs and started searching for my "homestead", which is why I'm here. Been building this land out since 09, when I bought it from a BK developer.

I was mainly talking about what he thought about that advice for the populace at large and where he thought the majority of folks were going to be heading when both the suburbs and cities went tits up? Rural isn't rural when 1 million folks from your closest population centers start blowing through town. Regardless, rural areas can't sustain a rapid poplation influx because of lack of infrastructure, not that I'm telling you something you don't already know. My point is that what works for a handful of ZHers doesn't work when applied to the population at large. This is what I was addressing with my question.

SRSrocco's picture

chubbar....sorry to not have responded sooner.   I would like to start by stating I am not a cheerleader or a happy advocate of the End of Suburbia (line coined by James Howard Kunstler).  There will be a great deal of upheaval and suffering as the suburban economy disintegrates.  We have plenty of smart people walking around the country that could design systems to transition us to something more local... but these folks aren't calling the shots.  Instead we have inept politicians and a leveraged based financial mindset that is in control.

The Suburban Economy was designed and built on cheap and abundant oil.  This was somewhat the same parallel as the 19th century Whaling Industry.  Because there were an abundant number of whales in the ocean, it allowed the growth of the whaling fleets and industry.  When we hit PEAK WHALES....we hit PEAK WHALING SHIPS and the equipment used in the manufacture of whale oil.

Now that we are hitting a Peak in Global Oil Production the situation becomes even more dire when we consider the falling EROI (energy returned on invested) of oil and gas as well as the negative ramifications of the Land Export Model.  I wrote about these in my PEAK SILVER REVISITED article that was posted here a few weeks ago.

I am currently writing another article that details all the aspects with plenty of charts and graphs.  But to answer your question about WHERE DO THE PEOPLE IN THE SUBURBS GO?  That is a tough nut to answer.  The big city is by far the worse choice due to the problems of logistics in keeping food and goods moving in when the US Empire moves from STAGE 1 of collapse to STAGE 2.  Stage 2 is the commercial collapse where we see shortages of goods, hyperinflation and hoarding of food and etc.

STAGE 1 has taken place already in 2008.  Stage 1 was the financial collapse.  Even though Banks are still open and bank accounts are still guaranteed by the FDIC...its all smoke and mirrors.  The public will find this out when the Bank Holidays are announced and Wal Marts are wiped clean within 4-8 hours.

As the system disintegrates, the best place to weather the storm is in the country or in small towns or cities  next to farming-ranching communities.  These areas will suffer the least amount of pain and anguish.

The ramifications of peak oil, the falling EROI and exponentially declining exports described by the Land Export Model will change the way of life here in the states more than most have forecasted or remotely considered.  This is something I am not happy about...but rather a pragmatic diagnosis of the system itself.




riphowardkatz's picture

at least 25-50% are you sure it isnt 75-90% more. Haahahahahaha. Cheapest it almost ever has been in gold terms, very few other places to store wealth, foreign visas coming for homeownership, 1-2% rates coming, rents exceeding 30 year mortgage rates in many areas, cash buyers galore, huge percentage of people that own outright(a floor from the unleveraged) 3 times the amount of money supply. And the number one reason housing is going up is that every person here and everywhere else is saying it wont. Copper the public.

Long-John-Silver's picture

The housing industry has changed radically. Most pundits (including the author of this article) do not understand this. People can no longer count on having a job close to a home they own. They must be mobile now. This means renting, not buying a home. This is going to drive housing prices down further than anyone can imagine.

devo's picture

This is a great point. I've actually considered investing in RV companies this past year. They've taken a beating because they are considered luxury/vacation vehicles this point, but they could quickly become the average American's primary residence...

Pladizow's picture

Alt Inv: Mobile Home Parks.

Long-John-Silver's picture

They are taxed as such as well. They can not be considered a primary residence under current law. I foresee Shipping Containers becoming the modern Mobile Home. They can be picked up and moved easily by Truck and Train. They are easily converted into housing as well. 



T1000's picture

Maybe these ex-homeowners can get a big break and pickup one of those discount shipping containers from Japan. Comes with its own indoor lighting. Glowing reviews. 

tamboo's picture

just blend in anywhere with a dumpster house.

you may want to chain it down to avoid the inevitable.

Berkeley man makes a (really rather nice) dumpster home
moneymutt's picture

Long John, totally agree. The stink of being trapped in an underwater house, having to be foreclosed on, lose credit worthiness etc will deter youngins from flocking towards housing. The typical churn of American families chasing jobs or being moved by company was covered by the appreciation of the house, but now when appreciation is a pipe dream, who wants to buy a house when they know they might need to move in a few years. Appreciation is no longer an incentive, being underwater is a valid fear, and the cost of buying an selling would make a lot of rent payments. Slowly but surely this is dawning on people and culture is shifting. If houses keep falling in price, even a little for five or ten years, it will be decades before attitudes change back to housing.

I have a friend the was with FBI in Chicago, and he wanted to move back to homeland adn extended family in MN but many people senior to him on the list wanted to do that also, so he thought he was stuck. But the next time a position in MN opened up, he got it, because everyone else on the list was underwater on their houses and didn't want to move while he had just been renting and got to live where he wanted.

There are so many condos for sale that are cheaper than rent, even with mortgage, prop tax and assoc fees counted in, but no one is buying. Cash buyers for rent can, but they worry about depreciation. ANd if you are going to rent, why not rent from a bigger facility and get lots of amenitities.

The big place for opportunity I think is convenient location small apts to make convenient location (read no car) affordable for lwoer wage people AND something I see no one doing, in MN, at least: rental facilities geared towards families with children. Yes they can rent a house, but how about multi-family in good school districts with gated parks with propety etc.

The final issue is credit...it used to be harder to qualify to rent than to buy, opposite is now true, so people with decent income cant qualifty to buy if they wanted.

jcaz's picture

Yep-  interest rates will keep home prices pinned until REAL housing demand occurs-  never gonna see home prices rise in a rising interest rate market (which is now FOREVER) with current fat inventory, it's all about that monthly payment to the the guy paying the mortgage......

Bass is just nibbling.

PulauHantu29's picture

You are awfully opiutmistic devo. Here, from Dr Housing Bubble web site:

"But going back to the previous chart, you will notice in the mid-1990s home values completely disconnect from the inflation rate and this peaked out in 2006.  After this period home prices cratered and for the first time in many generations did we see national real estate values fall on a year over year basis.  The last time this happened was during the Great Depression.  But look what we now have.  You will see inflation is slightly ticking up but home prices are still anemic or going lower.  Why?  There are multiple reasons for this trend but first, wages have gone negative and the job market is still weak.  We are 7 million jobs in the hole since the recession started and wages reflect this pain.  The U.S. dollar is being devalued by the Fed so imported goods increase a bit in price, food certainly has gone up, and so have other items like the bubble in college and fuel.  Yet home values remain stagnant."



The Big Ching-aso's picture

Yep, I ain't buying this guy's BS.     Bass is welcome to be hooked, hook, line, and sinker.   That's his biz.  Not mine.