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.