Wall St fund principal reduction program saves homeowners from foreclosure
As the nation struggles with the worst foreclosure crisis since the 1930s, Selene Residential Mortgage Opportunity Fund, and others like it are emerging as the best hope for the roughly seven million U.S. households behind on their mortgage payments.
Nimble, flush and willing to strike deals with borrowers, these funds have an edge over banks and other lenders that can be mired in bureaucracy and hampered by government rules about which loans can be renegotiated and how.
Case Study: How Selene Residential Mortgage Opportunity Fund kept Anna and Charlie Reynolds of St. George, Utah, in their home, were worried about losing their home to foreclosure last year.
The fund, managed by veteran mortgage-bond trader Lewis Ranieri, acquired the loan at a deep discount and renegotiated the terms with the Reynolds.
The balance due was cut to $243,182 from $421,731, and the interest rate was lowered. That reduced the monthly payment to $1,573 from $3,464, allowing the family to stay in their home despite a drop in Mr. Reynolds’ income as a real-estate agent. “It was a miracle,” says Ms. Reynolds.
Mr. Ranieri isn’t your typical miracle worker
As a fund manager who was once vice chairman of the bond-trading firm Salomon Brothers, Lewis Ranieri, is a member of the Wall Street crowd that is often pilloried for helping inflate the housing bubble, though he sat out the excesses of recent years. The 1989 book “Liar’s Poker” made him famous for billion-dollar trades in mortgage bonds and junk-food “feeding frenzies” with his trading-desk buddies.
Borrowers less lucky than the Reynolds family must work with middlemen—loan-servicing firms that don’t actually own loans, but represent banks and investors, and collect mortgage payments on their behalf. These firms follow often-ambiguous rules set by the owners of the loans. In cases where a loan has been bundled into a security, it might have thousands of owners scattered around the world, making it impossible to know all their preferences.
By contrast, Mr. Ranieri’s Selene is the sole owner of its loans and has a servicing affiliate that can negotiate directly with borrowers. “Every case is individual,” Mr. Ranieri says. “There’s no template.”
But the main reason Mr. Ranieri can strike deals with borrowers is that his firm buys loans, mostly from banks, at steep discounts to the balance due. If his fund pays $50,000 for a loan with a $100,000 balance due, for example, it can make a profit even if the borrower ends up paying back only $70,000.
Cutting the loan balance is key
Cutting the loan balance is one of the most effective ways to motivate borrowers to resume payments because it gives them more hope of eventually owning the home, say nonprofit groups that work with distressed borrowers.
But analysts say banks have been reluctant to reduce principal, partly because that would require them to recognize losses they still hope to avoid. Their modifications almost always involve reducing the interest rate or giving the borrower more time to pay.
Around 90% of Selene’s loan modifications involve reducing the principal, compared to less than 2% of the modifications done by federally regulated banks in the first quarter.
“There are obvious inconsistencies in treatment [of borrowers] depending on who owns and services the loan.” says Edward Delgado, a former Wells Fargo & Co. executive who is now chief executive of Five Star Institute, a provider of training programs for mortgage professionals. To some extent, he says, “it’s the luck of the draw.”
But only the lucky few have so far benefited from Selene or other distressed-debt investors. Selene, which owns about $1 billion worth of home mortgages, will say only that it has modified “thousands” of loans, a drop in the bucket among the millions of overdue mortgages.
Many loans are locked up in securities and thus unavailable for sale. In other cases, owners of loans aren’t willing to take the losses that would be needed to mark down the mortgages enough to lure buyers like Selene.
How Selene’s fund works with homeowners
Once Selene acquires a loan, the firm immediately tries to contact the borrower, sometimes sending a FedEx package with a gift card that can be activated only if the borrower calls a Selene debt-workout specialist.
Selene says it’s able to keep about half the borrowers it deals with in their homes through a refinancing or modified loan terms. Sometimes the company gets creative, paying off other debts, such as car loans, to lower a borrower’s overall debt load enough to qualify for a refinancing. In roughly 20% of cases, the home is sold without a foreclosure in a so-called short sale for less than the balance due.
As for the remaining 30% or so of cases—their luck runs out when Selene proceeds with foreclosure. The company says some borrowers can’t afford their homes, even at the reduced terms the fund would be willing to offer.
One reason Selene has the leeway to help borrowers is that it generally bypasses the federal government’s $50 billion Home Affordable Modification Program, or HAMP. The program offers financial incentives to lenders and servicers to modify loans.
When President Barack Obama announced HAMP 18 months ago, the program raised hopes among millions of borrowers. As of June 30, however, only about 389,000 households were benefiting from long-term reductions in payments under that program, and 364,000 were in “trial” periods, trying to qualify by showing they could make reduced payments.
Critics say the program is overly complex, unwieldy and revised so often that servicers have a hard time keeping up with the latest requirements for modifications. The Treasury Department blames servicers. They “have done a terrible job of making sure that they are doing everything they can to meet the needs of their customers who are facing the possibility of losing their home,” Treasury Secretary Timothy Geithner told a congressional panel in June.
Nonprofit counselors who help homeowners say far more borrowers have either failed to qualify or given up than have actually received modifications. Some borrowers have spent more than a year trying to find out whether they qualify.
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Source: http://online.wsj.com/article/SB10001424052748704720004575377022447064474.html
Technorati Tags: stop foreclosure, principal reductions, principal writedown, Selene Residential Mortgage Opportunity Fund, Lewis Ranieri
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