Warren Buffett's Next Big Investment Idea Has Everyone Baffled

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NEW YORK (TheStreet) -- Warren Buffett and Berkshire Hathaway aren't exactly unknowns in the business community, so it is odd that their bid for Residential Capital LLC appears to be attracting relatively little attention in the mortgage servicing industry, where ResCap is the fifth-largest player in the U.S.

Buffett seems to want to keep the low profile going. Reached on his office phone, Buffett said, "I really can't help you. Thanks anyway," before hanging up.

Servicers act as middlemen in the mortgage business, collecting payments from borrowers and passing them on to lenders. Typically, they are the first point of contact for homeowners who have an issue with their mortgage, though homeowners often don't have a very clear understanding of who servicers are or what their role is.

The four largest U.S. banks are still the largest mortgage servicers, though with the exception of Wells Fargo , they are exiting the business as little-known names like Ocwen Financial and Nationstar Mortgage Holdings look to grow.

And then there is Berkshire, which lost out to Nationstar in a contest to be the opening--known as the "stalking horse"--bidder for ResCap's mortgage servicing portfolio on Tuesday. However, Berkshire succeeded in lowering the breakup fee that will be paid to Nationstar if it is not ultimately selected to acquire the portfolio, thereby increasing Berkshire's chances of winning it.

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Berkshire came virtually out of nowhere this month to enter the bidding process, and it still seems to be having trouble being taken seriously by the mortgage servicing industry.

For example, Keefe Bruyette & Woods analyst Bose George expressed surprise in a note published late Monday after Berkshire raised its bid for the ResCap platform, which includes mortgage servicing rights on 2.4 million homes.

"The increased Berkshire bid suggests the company might be genuinely interested in purchasing this platform, which if successful could create a strong competitor. We originally assumed that Berkshire's only interest was in protecting its bond position," George wrote.

But Buffett's sudden interest in mortgage servicing still went unmentioned at a panel discussion in New York on Tuesday about investment opportunities in the industry at a conference hosted by National Mortgage News. Rather, the panelists appeared to be in agreement that interest in mortgage servicing rights (MSRs) is quite limited.

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"Obviously supply is going to outstrip the demand from the seller's perspective on MSRs," said Rudy Orman, an executive at Residential Credit Solutions, a mortgage servicer that specializes in nonperforming loans. Orman made the statement matter-of-factly, as the preface to a question for fellow panelist Tom Piercy of Interactive Mortgage Advisors, about when pricing would "hit bottom."

Piercy agreed that "we are in a conundrum of sorts right now with regard to very good quality product being originated with a substantial amount of legacy product being offered and not enough capital being applied to the space."

Those kinds of comments would surely be music to the ears of Buffett, who prides himself on buying into out-of-favor industries on the cheap. What's more, Buffett's sterling reputation would give him a decided edge in an industry that has "lost the benefit of the doubt before judges, before regulatory bodies and before certainly debtors counsel," according to Barry Johnson, attorney with SettlePou, a Texas-based law firm.

Buffett may have lost out to Nationstar on Tuesday, but it is unlikely his famous elephant gun will remain quiet for long in the mortgage servicing industry.

-- Written by Dan Freed in New York.

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