Hedge Funds Enter Mortgage Arena

Date: Saturday, October 13, 2007
Author: Associated Press

PHILADELPHIA -

Hedge funds and private equity investors are gaining a foothold in the business of mortgage loan servicing as some of the country's biggest mortgage lenders crash into bankruptcy. Their arrival on the scene has alarmed consumers and investors alike.

Over the last few months several failed mortgage lenders - including ResMae Mortgage Co., Aegis Mortgage Corp., and New Century Financial Corp. - have sold their loan-servicing businesses to hedge funds or private-equity firms.

The largest loan servicing business to go on the market to date - American Home Mortgage Investment Corp.'s $46 billion portfolio of 197,000 mortgages - is slated to be sold to a private equity firm affiliated with billionaire investor Wilbur Ross. That deal is scheduled for court review Monday.

Such initiatives have heralded a large-scale transfer of mortgages to a type of financial player that previously had little direct contact with U.S. home owners. Hedge funds and private equity firms have become famous for making some of their executives fantastically rich, but they're not exactly considered consumer-friendly.

Their acquisition of loan-servicing rights, as a result, has inflamed the anxieties of many homeowners who have reported loan-servicing disruptions recently.

"From a consumer perspective, it's an improvement to have these loans in a mainstream bank," said John Taylor, chief executive of the National Community Reinvestment Coalition, a collection of community groups. "It's not an improvement for them to end up in the hands of Wall Street. There isn't the conversation or the accountability." When it comes to consumer-protection regulations, Taylor said, "Wall Street has a moat around it."

In June, New Century, one of the country's biggest subprime lenders, sold its loan-servicing business to a hedge fund, Carrington Capital Management.

The sale generated an uproar. By September, community protesters were picketing Carrington's headquarters in Greenwich, Conn., complaining that the hedge fund was the only loan servicer in the country that was refusing to modify loan terms - a refusal that increased the risk of foreclosure for troubled borrowers.

"Carrington employees would not work with us," said Amy Schur, national campaign director for the Association of Community Organizations for Reform Now, or ACORN.

After the protests, she said, former New Century officials now working for Carrington promised to offer loan modifications, or agreements to adjust payments. But the hedge fund itself, she said, "is very closed. We have heard nothing from them."

Carrington's chief executive, Bruce Rose, did not return calls seeking comment.

American Home's plan to sell its loan-servicing business to W.L. Ross & Co. also has aroused consternation - not only from some of Wall Street's biggest banks but also from homeowners.

Paula Rush, a Maryland homeowner who could be affected by the sale, said in an interview that she's worried the consumer-protection provisions embedded in the loan terms could be stripped out in the sale.

"The assets that they're playing with in bankruptcy court represent homes and families," she said. American Home was "going to sell the loans stripped of their federal consumer rights," although she has received assurances from federal bankruptcy monitors that will not happen, Rush said.

Several banks also have raised concerns about Ross' qualifications to be a loan-servicer. A Bear Stearns & Co. mortgage affiliate said in court papers that it's worried about the sale because W.L. Ross is not a licensed mortgage loan servicer. Obtaining the necessary license, it said, may take as long as 10 months.

That could mean a continuation of the serious loan-servicing problems American Home has already encountered. American Home, which collapsed into bankruptcy in August, has bounced checks written on accounts where homeowner funds were supposed to be escrowed. Some of the bounced checks went to property tax authorities, putting homes in danger of foreclosure.

Wilbur Ross wasn't available for comment Friday. John Kalas, deputy general counsel for American Home, said replacement checks had been issued to cover the bounced checks. "As far as we know, the issues have been resolved," he said.

American Home's customers have also complained they're having difficulty determining who owns their mortgages. Laura Beall, a Virginia woman who said she was frightened by news of the bounced property tax checks, told the company she'd like to make her own property and insurance payments.

In court documents, Beall said American Home refused to tell her who now owns her loan. She said the company argued that its bankruptcy filing nullified its obligation to comply with federal laws that require such disclosure - an assertion the company disputes.

Beall said American Home told her it would let her pay her own taxes and insurance - provided she paid American Home a $1,300 processing fee.