The latest development in the mortgage market fomenting outrage in the streets and condemnation across the media spectrum is the spectacle of rich investors -- Wall Street traders, hedge fund operators, even former executives of the detested Countrywide Financial Corp. -- buying up delinquent home loans, reworking terms for borrowers, and selling them off to new investors at a handsome profit.
Here's what I think about these bottom feeders:
God bless them.
If there's one fact about the mortgage meltdown on which almost everybody agrees, it's that fixing the problem will require a multifaceted approach and involve multiple participants -- banks, borrowers, the government and private capital.
Over the last year or two, the last group has stepped up to the plate. Investors with billions of dollars have taken thousands of troubled loans off the banks' hands. They have done so on terms that give them great flexibility to modify the mortgages so that borrowers can afford the payments.
Theoretically, the banks could handle this themselves. But in the real world they're not up to the job, largely because of the structure and conditions in their industry.
Modifying a delinquent or defaulting home loan is a labor-intensive process, not easily handled by a workout officer with, say, 800 files on his or her desk. Moreover, banks panicky about their dwindling capital are reluctant to book losses until they have to.
So the banks refuse to talk to distressed borrowers until their loans are already months in arrears; even then, assuming contact is made, the banks are so desperate to minimize their declared losses that the terms they offer borrowers often aren't generous enough to save the loan.
What's the upshot? Thousands of troubled home mortgages sail through to foreclosure without the homeowner even being contacted by the lender, much less engaging in a rational dialogue. No one should be surprised that industrywide, nearly 60% of modified loans end up back in default within a few months.
In a well-tuned capitalist market system, this institutional failure would create an opportunity for entrepreneurs. And so it has.
Entrepreneurs like Louis Amaya, a former General Motors finance executive who co-founded San Diego-based National Asset Direct in 2006, when the housing crash was just beginning to glimmer on the horizon. Backed by the New York investment manager Ralph DellaCamera, the firm has spent about $135 million to acquire a portfolio of troubled mortgages with $325 million in unpaid balances, or an average of 41.5 cents on the dollar, Amaya told me. These are loans on which the banks have already taken a write-off.
He says National Asset reexamines every loan, making contact with the borrowers and documenting their finances. (The firm tries to keep its case load at no more than 200 files per manager.) Finding terms that the borrowers can meet over the long term may mean cutting principal to the current value of the property or lower, slashing the interest rate and spreading the payments over a new 30-year term.
The paramount goal is to create a performing loan; if the firm buys a delinquent loan at 40 cents on the dollar and turns it into a performing loan, it's worth much more. The investor is in the black, the homeowner is able to stay in the home, and the bank -- well, it's taken a loss but unloaded a splitting headache.
"We're not a charity," Amaya says, "but we make the most money when the borrower stays in the house."
The investors' initial outlay is so low that they can offer terms that a bank would find unimaginable. This week I talked to Pushpak Banerjee, 58, who had $180,000 in loans on a house now worth about $110,000 on the outskirts of Phoenix -- a first mortgage at more than 8% and a second at 12.35%, both about to reset at higher rates, driving his $1,700 monthly payment higher still.
The disabled Banerjee and his wife were a few months from default when their loans were acquired by Private National Mortgage Acceptance Co., or "PennyMac," which was formed in January 2008 by Stanford Kurland, the former chief operating officer at Countrywide. By then Banerjee had been trying for nine months, without success, to negotiate with his mortgage holder. PennyMac sharply slashed the rates on both mortgages, Banerjee said, cutting his monthly payment to about $900.
"At the beginning I was nervous," said Banerjee, whose name was provided to me by PennyMac. "I never heard of PennyMac and didn't know if they were a scam. But they came through."
PennyMac, Kurland says, does more than deal with delinquent borrowers on a case-by-case basis. It also tries to identify loans in its portfolio that may be heading toward delinquency even if they're still current, and work out new terms with borrowers before they fall behind. "We're set up to be preemptive," he says.