KKR Financial Holdings LLC — a former real estate investment trust that is attempting to liquidate its residential mortgage assets — said it lost $40 million selling off $5.1 billion in residential mortgage loans and could lose its entire $200 million stake in its remaining mortgage-backed securities.

The recent sale of $5.1 billion in residential mortgage loans and related interest-rate swaps left the San Francisco-based company with $5.8 billion in mortgage loans, mostly in the form of residential mortgage backed securities (MBS). Those securities are financed primarily by non-recourse, asset-backed secured liquidity note facilities, with the company’s equity in those notes totaling $200 million.

In a Securities and Exchange Commission filling, KKR said it could lose all of that money — and up to $50 million more — because of “unprecedented disruption in the residential mortgage and global commercial paper markets.”

Although KKR has initiated discussions with investors in its asset-backed secured liquidity note facilities about ways to resolve potential funding disruptions, it said “no assurance can be made that any of the strategies being evaluated by the company will be successfully executed.”

In its last quarterly report to investors, KKR said its investment portfolio totaled $18 billion as of June 30, including $11.2 billion in residential mortgage loans and securities, and $6.5 billion in corporate loans and securities.

As a real estate investment trust (REIT), KKR was required to generate at least 75 percent of its income from real estate-related assets. In May, KKR converted from a REIT to a limited liability company (LLC). KKR was attempting to dispose of its existing portfolio through a run-off of the assets through principal payments and prepayments, or through “strategic alternatives” such as the sale of the common stock of its REIT subsidiary.

The company’s residential mortgage loans and securities consist of ARM loans, hybrid ARM loans, or securities backed by such loans.

At the end of 2006, under new accounting rules, KKR wrote down the value of its residential mortgage investments by $55.7 million to reflect their fair value on the company’s books. The value of KKR’s residential mortgage portfolio was written down $35.6 million, to $5.07 billion, while MBS investments were valued at $7.5 billion, or $21.6 million less than before implementation of the rules.

On June 30, KKR’s residential mortgage loan portfolio totaled $4.6 billion, with an average original FICO score of 735 and loan-to-value ratio of 68.4 percent. The estimated fair value of KKR’s residential MBS was reported as $6.6 billion.

Show Comments Hide Comments

Comments

Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Success!
Thank you for subscribing to Morning Headlines.
Back to top
We're giving away 3 free ICLV tickets at Connect Now next week. Register and attend live for your chance to win!REGISTER×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription