Ultimately solving the current housing and mortgage mess isn't likely to come from measures now being debated on Capitol Hill -- that's the message that was whispered in hallways and at coffee breaks at a recent MBA Secondary Market convention in Boston. Instead, solutions are already emerging on various fronts from aggressive investors looking to turn trouble into profit; the result may just yet be a stabilization of housing's teetering axis.
A wide-ranging, hodge-podge, and completely disjointed group that can best be called "distressed mortgage asset investors" is emerging within the industry, and their approaches to the problem can be as varied as the organizations themselves.
One small example is Angel Gutierrez, an investor in San Diego that buys whole loans on what's known as a "onsies, twosies" basis. Gutierrez knows his local area and scopes out potentially troubled homeowners; his goal isn't exactly altruistic, but it does manage to keep credit scores out of harm's way for borrowers facing foreclosure.
Gutierrez buys bad mortgages a dozen at a time for a fraction of their face value from lenders overwhelmed by the highest number of defaults in 23 years. When he goes door to door to negotiate lower payments for homeowners or pay them to move so he can sell the house, he's speeding up the recovery by establishing a price for the homes and flushing out the least reliable borrowers.
"You buy the mortgage for pennies on the dollar, carry the big stick, tell the homeowner how it's going to be, then double your money very easily," Gutierrez said.
Most of the time, "how it's going to be" is a cash-for-keys agreement and an accord to keep the borrower's credit intact; and, of course, guys like Gutierrez only step in where the house can actually be resold at a profit. But there are plenty of erstwhile investors like him out there -- sort of the new breed of home flipper, many of them coming from that side of the business before learning to ply their trade in the industry's back side.
Building a bigger-money pool
There are more institutional plays out there than just local door-bangers like Gutierrez, of course. More than a few huge hedge funds and distressed asset specialists are lining up captive servicing operations, with the distinct goal of buying distressed mortgages and then actually keeping the borrower in their home.
One such example is San Diego-based National Asset Direct
, which owns its own servicing shop called iServe Servicing. The company recently moved into the California market with a license to grant and service loans in the state; NAD characterizes iServe as a "high-touch" servicing platform, a term that means the servicer invests heavily in loss mitigation. And, of course, by buying up bad mortgages for pennies on the dollar, servicers like iServe can do quite a bit more to refinance a troubled borrower into a more affordable mortgage.
"As an opportunistic buyer of distressed residential assets and loans with its own servicing platform, NAD is uniquely positioned to provide a private-sector solution to many home owners whose lives have been affected by the ongoing dislocation in the U.S. mortgage industry," said CEO Louis Amaya in describing his firm -- and while it is likely that companies like his will play a pivotal role in helping housing recover, the business model is quickly becoming anything but unique within the industry.
BlackRock Inc. (BLK)
, the biggest publicly traded U.S. asset manager, said in March it was backing a new company called Private National Mortgage Acceptance Co. LLC
, also known as PennyMac, that will buy mortgages at a discount and look to make money in the so-called scratch-and-dent business. PennyMac has a $2 billion war chest to step in and start buying, and will bankroll its own in-house servicing platform; BlackRock also recently negotiated a deal
to snap up $15 billion in mortgages from Swiss bank UBS AG (UBS)
Beyond BlackRock's move, Marathon Asset Management, LLC
, a global investment manager with $10.6 billion under management and over $20 billion in assets, is also buying up distressed mortgages and is also pumping the mortgages it buys to its own captive servicing operation, Phoenix-based Marix Servicing, LLC
. The company has said in recent weeks that it has been buying well over a billion dollars in bad mortgages for the platform to service; it's not clear how successful the "high touch" servicing model has been just yet, but the approach is clearly yielding dividends for investors.
Banks stepping into the fray, too
Even forward-thinking banks are now sensing opportunity in the distressed asset space, stepping in to compete directly with hedge funds to purchase assets that might otherwise flow through to foreclosure and REO losses. In some cases, some banks are looking to step in to buy assets directly from the hedge funds that themselves purchased a portfolio of distressed mortgages, too.
Kate Berry at American Banker
covers the story of National Bank of Kansas City
, a community bank with a big plan to boost FHA volume:
Since January the $963 million-asset Overland Park, Kan., unit of Ameri-National Corp. has been approaching noteholders with a proposition: Identify loans in your portfolio that you would like to unload, and the bank will solicit the borrowers to refinance.
The loans it targets are current but typically are adjustable-rate mortgages whose teaser rate is soon to reset. "These loans might have a high possibility of default or foreclosure, and the noteholder would rather get them refinanced," said Todd Geiman, an executive vice president at the bank's mortgage division ...
Bill Alread, a managing partner of contract finance at Steel Mountain Capital Management LLC, a Lakewood, Colo., investor in scratch-and-dent mortgages, said it has had "quite a bit of success" using the program. "This is one of the few options to show liquidity out of our portfolio."
Regardless of the approach -- and there are many -- one thing is becoming clear: investors aren't waiting for legislators to spend taxpayer dollars. Not when there is money to be made, even in bad mortgages or the increasing number of junk bonds backed by them.
Disclosure: The author held no positions in any publicly-traded companies mentioned herein when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.