Wall St. Finds Profits Again, Now by Reducing Mortgages

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Slimme wolven of toch jakhalsen?

Veertig procent van $440000 is toch immers $176000, en als die verkocht
wordt voor $314000 is de winst toch $138000 (dus 44%)?

Als de uiteindelijke koper dan de Federal Housing Authority is, waarom
koopt die dan niet zelf voor $176000 en laat het papierwerk door een
administratiekantoor verzorgen?

Nu gaan de bewoners misschien/waarschijnlijk toch nog eens een keer
achterstallig blijven met de betalingen van hun hypotheek, en dan hangt
de belastingbetaler.
Terwijl iemand anders niet alleen lachend naar de bank loopt, maar hem
misschien ook nog wel koopt.

Groet / Cees

http://www.nytimes.com/2009/11/22/business/22loans.html
November 22, 2009
Back to Business
Wall St. Finds Profits Again, Now by Reducing Mortgages
By LOUISE STORY
As millions of Americans struggle to hold on to their homes, Wall Street
has found a way to make money from the mortgage mess.

Investment funds are buying billions of dollars’ worth of home loans,
discounted from the loans’ original value. Then, in what might seem an
act of charity, the funds are helping homeowners by reducing the size of
the loans.

But as part of these deals, the mortgages are being refinanced through
lenders that work with government agencies like the Federal Housing
Administration. This enables the funds to pocket sizable profits by
reselling new, government-insured loans to other federal agencies, which
then bundle the mortgages into securities for sale to investors.

While homeowners save money, the arrangement shifts nearly all the risk
for the loans to the federal government — and, ultimately, taxpayers —
at a time when Americans are falling behind on their mortgage payments
in record numbers.

For instance, a fund might offer to pay $40 million for a $100 million
block of mortgages from a bank in distress. Then the fund could arrange
to have some of those loans refinanced into mortgages backed by an
agency like the F.H.A. and then sold to an agency like Ginnie Mae. The
trick is to persuade the homeowners to refinance those mortgages, by
offering to reduce the amounts the homeowners owe.

The profit comes when the refinancings reach more than the $40 million
that the fund paid for the block of loans.

The strategy has created an unusual alliance between Wall Street funds
that specialize in troubled investments — the industry calls them
“vulture” funds — and American homeowners.

But the transactions also add to the potential burden on government
agencies, particularly the F.H.A., which has lately taken on an outsize
role in the housing market and, some fear, may eventually need to be
bailed out at taxpayer expense.

These new mortgage investors thrive in the shadows. Typically, the funds
employ intermediaries to contact homeowners and arrange for mortgages to
be refinanced.

Homeowners often have no idea who their Wall Street benefactors are.
Federal housing officials, too, are in the dark.

Policymakers have encouraged investors and banks to put more consumers
into government-backed loans. The total value of these transactions from
hedge funds is small compared with the overall housing market.

Housing experts warn that the financial players involved — the
investment funds, their intermediaries and certain F.H.A. approved
lenders — have a financial incentive to put as many loans as possible
into the government’s hands.

“From the borrower’s point of view, landing in a hedge fund or private
equity fund that’s willing to write down principal is a gift,” said
Howard Glaser, a financial industry consultant and former official at
the Department of Housing and Urban Development.

He went on: “From the systemic point of view, there is something
disturbing about investors that had substantial short-term profit in
backing toxic loans now swooping down to make another profit on cleaning
up that mess.”

Steven and Marisela Alva say they do not know who helped them with their
mortgage. All they know is that they feel blessed.

Last December, the couple got a letter saying that a firm had purchased
the mortgage on their home in Pico Rivera, Calif., from Chase Home
Finance for less than its original value. “We want to share this
discount with you,” the letter said.

“I couldn’t believe it,” said Mr. Alva, a 62-year-old janitor and father
of three. “I kept thinking to myself, ‘Something is wrong, something is
wrong. This sounds too good.’ ”

But it was true. The balance on the Alvas’ mortgage was ultimately
reduced to $314,000 from $440,000.

The firm behind the reduction remains a mystery. The Alvas’ new loan,
backed by the F.H.A., was made by Primary Residential Mortgage, a lender
based in Utah. But the letter came from a company called MCM Capital
Partners.

In the letter, MCM said the couple’s loan was owned by something called
MCMCap Homeowners’ Advantage Trust III. But MCM’s co-founders said in an
interview that MCM does not own any mortgages. They would not reveal the
investor that owned the Alvas’ loan because they had agreed to keep that
client’s identity confidential.

Michael Niccolini, an MCM founder, said, “We are changing people’s
lives.”

In Washington, mortgage funds are lobbying for policies that favor their
investments, particularly mortgages held in securitized bundles. They
want more mortgage balances to be lowered, which might help mortgage
bonds perform better. Big banks generally oppose such reductions, which
lock in banks’ losses on the loans.

In April, about a dozen investment firms formed a group called the
Mortgage Investors Coalition to press their case. One investor who is
speaking out is Wilbur L. Ross, who runs a fund that buys mortgages and
owns a large mortgage servicing company.

Mr. Ross said modifications that simply lower interest rates or lengthen
the duration of a loan, as is typical in the government modification
program, do not work well.

“They make a payment or two, but then one night the husband and wife
will sit down at the table and say, ‘Do we really want to make 140
monthly payments into a rat hole?’ ” Mr. Ross said.

The Fortress Investment Group, a hedge fund in New York, is one of the
firms at the forefront of picking through mortgages. Fortress created a
$3 billion credit fund in 2008 partly to buy loans from banks like
Citigroup, which were under pressure to purge loans to raise cash.

“They’re going ahead and they are refinancing them and getting their
money out right away,” said Roger Smith, an analyst at Fox-Pitt Kelton.
“What Fortress is doing is actually good for the borrower.” Congress,
however, may not be happy that hedge funds are making money this way,
Mr. Smith said.

Fortress, which declined to comment, typically buys batches of loans and
works with other companies to evaluate which ones might qualify for
F.H.A., Fannie Mae or Freddie Mac refinancing.

Sometimes Fortress works with Nationstar, a mortgage servicer and
originator that it owns. Other times, Fortress uses an outside partner
like Meridias Capital, a lender in Henderson, Nev., that once originated
Alt-A loans, which are just above subprime.

After the mortgage market imploded, Meridias began dissecting portfolios
of troubled loans for investment funds.

Because firms like Fortress purchase blocks of mortgages at distressed
prices, they are able to reduce the principal amount of the loans. Nick
Florez, president of Meridias, calls such transactions an “incentive
refinance.” He said he would not agree to take a loan unless he could
help the homeowner. He said he was able to reduce the loan amount by 11
percent on average.

“I’m giving money away,” said Mr. Florez, who is a 35-year-old Las Vegas
native. “It’s really a feel-good business.”

It is too early to know how the new loans will work.

David H. Stevens, the new commissioner of the F.H.A., said he was
monitoring F.H.A. lenders but did not have thorough information about
which ones work with distressed investors. So far he has not seen a
problem from loans coming from hedge funds.

“They’re helping to protect people in their homes and they’re
refinancing people from a distressed situation,” he said.

But he acknowledged that funds have an incentive to aggressively push
homeowners into federally guaranteed loans, since the investors get
their money back as soon as they complete the refinancing.

Seth Wheeler, a senior adviser in the Treasury Department who
specializes in housing policy, declined to say whether the investment
firms that are lowering principal for homeowners are altruistic or not.

“Investors are doing it where it both benefits the investor and the
borrower,” he said.

Part of the risk may be determined by how the funds compensate the
F.H.A. lenders and whether the lenders are beholden to the funds for
business.

David Zitting, the chief executive of Primary Residential Mortgage, the
company that refinanced the Alva family’s loan, said his company did not
receive fees from the hedge funds.

“They have all sorts of motivations that, frankly, we don’t understand,”
he said. “We don’t do anything special for them because that’s not fair
lending.”

The Alvas had to dip into their savings to qualify for their new
federally insured loan, since the biggest F.H.A. mortgage they could get
was for $285,000, they said. They paid off $21,000 in credit-card and
car loans, and put up an additional $29,000 for their new mortgage,
depleting their already meager savings.

Brian Chappelle, a mortgage consultant, said loans to people like the
Alvas, with modest incomes and scant savings, could turn out to be
risky.

“It does raise risk concerns for F.H.A.,” he said.

The Alvas are grateful for the help. Their home is, Marisela said, a
dream come true. “I’m very happy,” she said. “We never thought this was
possible.”

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