Bruce Rose and his wife Rosemary consider themselves giving people. Their foundation, Carrington Charitable, last year raised $500,000 on the golf course. The beneficiary of the proceeds, the Veterans Airlift Command, arranges transportation by private jet for severely wounded veterans and their families.
Rose sometimes donates flight time on the planes owned and operated by his many real estate companies under the Carrington hedge fund umbrella. On occasion, the commercial-certified pilot will fly the mission himself.
And then there was the time when the Extreme Home Makeover television show approached Carrington with an opportunity to “do the right thing.” On the show, a disadvantaged, disabled couple in the Midwest was living in a home whose mortgage was serviced by Carrington Mortgage Services. The producers asked if Carrington could help at all — a discount on the mortgage payment, perhaps some construction service (Rose also operates White Van property preservation) — even though the mortgage was current at the time of filming.
For Rose it was a no-brainer. Carrington bought the mortgage out of the trust using company funds and donated the note to the couple. There is even a 15-second clip of a Carrington associate dramatically tearing up the mortgage for the cameras.
“The interesting thing about it though, was we weren’t named anywhere in the show,” said Bruce Rose, reflecting on the moment in a rare media interview. “There was no reference to Carrington, there was no advertising and we didn’t ask for any credit. And when I had the chance to play the clip again for a town hall meeting internally, the message I gave to the troops was that you always do the right thing, even when nobody’s watching,” he added.
“And everybody gets it — we didn’t tear up that mortgage because we were doing it for the credit or for the advertising or to get Carrington’s name out there,” he said. “We did it because it was the right thing to do, it felt good and it helped out a family that really deserved the help. That’s the way the company is run — that’s the philosophy we’ve always approached everything with.”
It’s a side of Carrington not many people know.
Rose gets enough comfort out of it. He has no trouble sleeping at night. He has no regrets. He’s comfortable with his place in the world, and can balance the pros and cons life throws at him. In all, he’s a very likeable person.
Yet his company can rub some people the wrong way, even when it is operating for the right reasons. For this, Rose never apologizes, never backs down and has come out on top, nearly each and every time. Rose, for his part, will tell you it comes down to the business practices that underpin Carrington.
“Our company has done everything that it can do for the best benefit of the borrower-investor longer term. Where we think it’s somewhere between ironic and amusing, is while we were working as hard as possible to keep borrowers in the houses and keep the assets cash flowing, right outside our doors and right outside my home we were being picketed by the ACORNs and the NACAs of the world, and then simultaneously in the press we were crucified by Declaration, Magnetar and analysts like Amherst for not foreclosing fast enough.”
Magnetar is the now-infamous Chicago-based hedge fund accused of manipulating collateralized debt obligations. Investors filed suit in April in an effort to claw back some losses. Declaration Management & Research remains in business as a Securities and Exchange Commission registered investment adviser managing approximately $10 billion in institutional assets. Austin, Texas-based Amherst Securities operates as a broker-dealer in residential mortgage-backed securities, agency securities and select fixed-income investments, and the company’s research team is among the most influential in the mortgage industry.
“We could kind of take the middle of the road and say ‘Well if we’re irritating everybody, we must be doing a good job.’ But what I think was the most gratifying from my perspective is then a few years later when the noise died down, we watched ACORN shoot itself in the head, it became evident that NACA was nothing more than a shakedown for fees from us, as was ACORN originally.”
Neighborhood activist the Association of Community Organizations for Reform Now, or ACORN, filed for bankruptcy at the end of 2010 in the wake of videos showing employees recommending immoral borrower behavior. Its final office closed in May 2012. The Neighborhood Assistance Corp. of America still provides housing counseling services but has been criticized for allegedly trying to strong-arm mortgage bankers into reworking lower-income mortgages.
If there is a winner to any of these contentious and sensitive issues, that person is Bruce Rose.
INVESTORS AND TROUBLE
Earlier this year, things came to a very Carrington-esque conclusion. The hedge fund and American Home Mortgage Servicing, now known as Homeward Residential, agreed to settle a three-year dispute over how REO tied to a subprime mortgage bond was managed. The terms of the agreement were not disclosed.
Rose said the common misperception outside of Carrington was that there was one central lawsuit between Carrington and American Home over servicing practices. There was more than one suit, he said, but the original case involved Carrington suing Homeward Residential.
Carrington was the plaintiff, and not the defendant, in the initial lawsuit filed in March 2009 — a misunderstanding for some who believe it was the other way around. Carrington had negotiated a provision embedded in its pooling and servicing agreements called the “rights of the CE holder.” This is in reference to the investor that holds most of the riskiest credit enhancement tranche, or so-called “residual class.”
This CE rights provision allowed Carrington to control the foreclosure and REO disposition process on every loan it purchased from any of the originators. Rose maintains nothing was conducted behind-the-scenes. The rights of the CE classholder were fully disclosed in the investment prospectus, in the PSA and, Rose said, discussed widely with investors that bought into Carrington’s issuance in the primary market.
When American Home Mortgage Servicing acquired Option One Mortgage in April 2008, the Dallas-Fort Worth-based servicer acquired rights to service loans in Carrington-led securitizations. Option One had been flawlessly following Carrington instructions for the life of the securitization, Carrington alleges in the lawsuit. The lawsuit resulted when AHMSI allegedly neglected to maintain the CE holder’s rights, according to filings with the Connecticut Superior Court. Rose said he felt he had little choice but to go to court.
“In order to protect our investors, our bond holders and our invested capital, we took the dispute to the courts,” Rose said.
“American Home (now Homeward) responded with a lawsuit against me personally,” Rose claims.
The second lawsuit, which alleged racketeering, was filed by American Home in early 2009 and announced in the press but was quickly withdrawn in May 2009, according to court documents. It received media coverage by journalists who labeled the dispute an example of “tranche warfare.”
“I think what generally got blown out of proportion was that this was a simple contract dispute between Carrington as plaintiff and American Home as defendant,” Rose said. “We didn’t spend five seconds responding to American Home’s lawsuit back to us. It was dismissed and it’s gone.”
Rose describes the whole event as a triumph, and a simple contract dispute that got blown out of proportion. Carrington’s internal operations and leadership, meanwhile, remain big fans of both the people and work at Homeward Residential, Rose said. Rose’s firms still provide real estate services for Homeward, both as a vendor and a counterparty. But the American Home dispute was not the only time business relationships have landed Rose and Carrington in court.
“With respect to investor complaints, I have one investor that represents slightly less than 10 basis points of our overall invested capital … that claimed that he had special rights to withdraw capital at a point in time when he didn’t,” Rose said. He declined to identify the investor.
“That particular lawsuit, the only one that’s arisen from the investor side, is proceeding nicely in our favor. And I’m not going to say that I don’t care, but it’s not something that I spend a lot of time thinking about,” Rose said. If this conversation were happening on Twitter, one half-imagines Rose would end it with the hashtag #winning.
Rose estimates there have been probably 100 to 200 borrower lawsuits against Carrington, none of which have resulted in any significant action or settlement with Carrington, he said. Most of the suits were inherited from defunct subprime lender New Century Financial that Carrington now services for other investors.
There’s also former Ohio Attorney General Richard Cordray’s now-dismissed lawsuit against Carrington for alleged noncompliance with a consent decree involving now-defunct subprime lender New Century. In May 2007, Carrington paid $188 million to buy New Century’s servicing rights. Cordray, meanwhile, moved into the director position at the Consumer Financial Protection Bureau and his replacement, Mike DeWine, dismissed the suit.
“That covered something less than 7% of the total number of loans that we serviced in the state of Ohio,” Rose said. “The state AG that filed that lawsuit was voted out of office. His successor came into office, and within a short couple of months, dismissed the lawsuit, no action, nothing required out of Carrington. We’re now proud to serve the people of Ohio with real estate, lending and property services.”
GENERATING RETURNS
The stated goal for Carrington’s invested capital is to generate a return based on the ability to manage mortgage credit risk. And mortgage credit risk is nowhere more evident than in the lowest classes of the security, typically the first to absorb any credit losses. So Carrington intentionally created and retained as much of the credit risk as it could, and structured its securitizations to make sure that Carrington can control mortgage credit risk as much as possible.
It’s all part of the plan. “By the way, I think it’s important to note that while we were the first to create a provision known as the “rights of the CE holder,” that’s more or less become standard in any of the residential securitizations that’s taken place post-apocalypse here,” Rose said.
“We expect to see it built into virtually every non-agency securitization that comes out in the future,” he adds. “The guy who creates the risk and who retains it on balance sheet is ultimately going to want to retain the ability to control it — that we started demonstrating as early as 2004.”
That same control of credit risk by a single classholder, analysts at Amherst had argued, may give a servicer differing incentives to behave, which may in turn prove counterproductive to investors. Rose argues this is nonsense. Consider that each class in the security represents an undivided interest in the entire pool of loans, Rose begins. “Even though we bought and retained the credit risk that was at the bottom of the securitization, we owned a vertical slice of every loan throughout the entire trust,” he said.
“So it’s not that we put the riskier loans down at the bottom and we sold the safer loans at the top. Think of it this way: You put all the loans in a giant bucket and you mix them around until they’re kind of homogenous and they don’t really have any individual identity,” Rose explains. What Carrington ends up doing is selling pieces out of that bucket where all the loans are mixed together and the most important part about that is an investor, at various levels, participates in kind of the weighted average performance of all the loans. This happens all the way across the spectrum, except that the investor can choose how safe he wants his investment to be.
So by choosing the top level at AAA, the probability that an investor will incur credit risk is very remote. But by choosing the bottom noninvestment grade, the investor is going to receive the maximum impact of any credit. At least, this is what Carrington claims. And there is no shortage of investors as a result.
“Where certain classes of investors and analysts got it wrong, is they viewed the obligation of the servicer and the trustee to protect duration, the length of time that each of these notes were outstanding,” Rose argues.
Rose makes the case that his structured deals are typically more credit-enhanced, have more subordination, and more excess cash flow available to the more senior bondholders than most of what is still out there in nonagency mortgage securities land. But this is not by a substantial margin, and certainly not enough to attract suitcases full of cash to go to operational expenses.
“I think the edge that we had is when we bought loans, we were known as an extraordinarily difficult investor. We had a very intense diligence protocol. We bought virtually zero-exception loans in an environment that was based in exception-based lending. I guess we could say we bought the best of the production that was out there, but given that effectively that the entire market failed, there’s a little consolation in that,” Rose said. “Self-evident, we’re still here and our deals are still outstanding when just about everybody else is wiped out.”
THE AMERICAN DREAM — TO RENT
Carrington is betting on REO-to-rentals, big time. Privately-funded mortgage originations cratered in 2007 and 2008, but not before the easy liquidity of the nation’s housing boom gave a lot opportunities to a lot of people to buy houses. Directionally, the effort to lend more freely was aligned with both social policy and with where the government wanted to be — the American Dream of homeownership.
Homeownership rates in the U.S. peaked at 68% to 69% during 2006. Rose estimates that these rates will revert back to something that looks like the mean trend over time, and may overcorrect in the short term. “I know that the popular notion is that housing ownership probably descends down to 62% to 63%, we actually think it could get low as 59% to 60% over time. But it’s not a bad thing,” he said.
“We gave an opportunity for a whole class of people to buy houses — that was a good thing,” he said without a hint of regret. “The fact that some of them couldn’t perform isn’t necessarily their fault, isn’t necessarily the Street’s fault. The reliance on housing price appreciation to drive the whole equation effectively became the bubble that burst. Let’s get over it and move on.”
Moving on, a significant portion of those homeowners now make up the foreclosures coming onto the market (or soon-to-be on the market). And these now former homeowners are going to need a solid roof above their head, even if they can’t afford to buy or access available financing. Which seems to mean an increased demand for rentals; and, perhaps even, skyrocketing demand.
Carrington talks REO-to-rentals today, as it did back in 2009, when I first started at HousingWire. For all I know, the company talked about it even before that time. But the recent taboo of discussing renting to former boom-time homeowners is now the cocktail party chatter du jour. Carrington was there when it put those people into homes, and it will be there when they now need to rent, too.
And it’s in the rental market where Rose believes Carrington will likely encounter some additional friction on the road ahead of it.
“Virtually every high net-worth or single investor out there wants to buy a house and rent it out,” Rose said. “And the market is seeing a lot of the private equity types, a lot of distressed real estate money flooding toward this asset.”
Carrington, however, has some trepidation regarding the way the market is moving with these developments in mind.
“What we’re particularly concerned about is the trend of the larger investors to go out and buy courthouse-step sales, force the eviction of a borrower when they’re not a licensed servicer and trying to attack this trade with capital, as opposed to infrastructure and system,” Rose warned. “So I think there’s going to be some blowups. I think there’s going to be some mistakes. We’re trying to stay out of the fray. We’re not looking to take this public. We’re not looking for the get-rich quick. We’re not going to flip houses. We don’t consider this a two- or three-year investment. This is an ultra-long term hold. “
What Rose calls “the worst thing that this market will see” is if a bunch of the fast money rushes in and then flips the houses. This could lead to a double bounce on the bottom.
“The competition for assets in certain markets has already caused us to depart those markets. Where the investor perception is, ‘Gee it got really cheap so it must be distressed so I should buy it there,’ all of a sudden we’re seeing properties that are selling at 110% to 120% of list,” Rose said.
Carrington is currently operating rentals in 30-plus states — in 70 or so cities, Rose said. When determining how to treat an asset, Carrington uses a net present value equation on each individual asset that includes the forward curve projecting housing price (for sale) versus the net cash flow (for rentals).
If that calculation generates a positive return versus selling the house today, Carrington keeps the house. If it generates a negative return, the house gets sold.
However, in 2010, Carrington revised its internal housing price index. Upon revision, the company noticed many of the houses Carrington held as rentals would start to reach a negative NPV in a year or so.
“Our goal originally in 2007-2008, was to ride out until the recovery in the housing market, which we thought was going start to show some signs of relief sometime third or fourth quarter of 2010. Okay, guess what? I was wrong, but I don’t think I was the only one who was. “
“We sold occupied, well-maintained retail-priced houses, as opposed to selling through an REO agent that got a price for a vacant, boarded-up house,” Rose adds. “So ultimately between the value enhancement by having the house occupied and maintained, plus the cash flow from the net rental, delivered better overall proceeds to the trust, as opposed to just marking it down and selling it out.”
Rose estimates his company processed approximately 15,000 houses for Fannie Mae’s tenant-in-place program beginning in February, 2010, and it continues to work on the program with Fannie today as well. Carrington itself burned through 3,500 to 4,000 houses held in private securitizations it serviced. Carrington is also operating a tenant-in-place program for two major unnamed financial institutions, as well as participating in a joint venture with Oaktree Capital in Los Angeles to deploy an initial investment of nearly $500 million into the REO rental market.
So, one can disagree with the tactics of Rose, Carrington, and its vast array of subsidiaries (15 different companies operate under the Carrington umbrella, at last count). It’s not hard, after all, to have a quibble with one of the few institutions that banked during the boom, survived the bust and is continuing to push ahead during what so far has been an amazingly unsettling recovery. But Rose feels his business model has been vindicated, despite the criticism some loft his way.
“I think what’s important to note, that yeah, there’s criticism from consumer activist groups, there’s some criticism from the realty firms and so forth,” Rose said. “But we disagree.”
