July 19, 2010 / 4:50 PM / 10 years ago

CarVal buys stake in home loans from failed AmTrust

NEW YORK, July 19 (Reuters) - A consortium including U.S. hedge fund CarVal Investors has purchased a 40 percent interest in $898 million of distressed residential mortgage debt in a resolution of assets from failed AmTrust Bank, the Federal Deposit Insurance Corp said on Monday.

The group, which also includes Residential Credit Solutions, Inc. and RBS Financial Products Inc, paid about 37 percent of the unpaid principal balance on the loans that are mostly non-performing, the FDIC said in a statement.

The FDIC will retain a 60 percent stake in the transaction to share in return on the assets. The consortium won the stake over four other bidders.

Investors who purchase bad loans are betting they can boost the value of the loans with modifications, or collect proceeds when they sell the underlying property. By purchasing the loans at a steep discount, they have flexibility to offer borrowers better terms or sell the property into a soft market.

Residential Credit Solutions will apply federal loan modification guidelines to eligible mortgages, most of which are on homes in some of the hardest-hit states, the FDIC said. (Reporting by Al Yoon; Editing by Leslie Adler)

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