Mortgage 'Vultures' Keep Defaulting Owners in Homes

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You might think a vulture is the least likely creature to help you save your home. But there's a group of vultures who are doing just that -- in fact, they're being more of a friend, to many homeowners in trouble, than banks are.

One of them, mortgage-bond trader Lewis Ranieri, has developed a method to keep troubled borrowers in their homes by buying up mortgages at distressed prices, lowering principal balances and helping people make payments on time.

His firm, the Selene Residential Mortgage Opportunity Fund, is one of several working in the distressed market arena that are actually having great success helping homeowners stay out of foreclosure. Three others are in the same game: hedge fund Fortress Investment Group; Wilbur Ross, a well-known buyer of distressed assets; and Jeff Kaplan of National Asset Direct. All four buy mortgages on the cheap and write down principal to give underwater homeowners a reason to want to stay in their houses.
Here's how it works. Ranieri buys loans at 40 percent to 50 percent of their original principal value, so he has a lot of room to negotiate a workable deal with homeowners. Then he lowers the principal of the mortgage to a value that gives the homeowner some equity -- a perfect formula for giving borrowers renewed pride in their homes and a renewed incentive to want to make payments on time.

Loan modifications through Selene have included principal reduction 90 percent of the time, compared with the less than 2 percent rate of modifications reported by federally regulated banks at the end of the first quarter.

Once a borrower pays on time for six months, Ranieri then has a performing asset that can be sold on the market, often to Fannie Mae or Freddie Mac. He makes his profit by turning a nonperforming loan into a performing loan worth more than he paid for it. Many times he gets his loans through bankruptcies or other types of distressed sales, especially when a bank goes out of business. For example, he bought the assets of Taylor Bean & Whitaker by winning a bid with a U.S. bankruptcy judge in Jacksonville, Fla. The pool of assets that he purchased included 1,046 bank-owed residential properties appraised at $330 million. He paid $81 million.

This isn't the first time that Ranieri has used this method to make money. He based his current model on a business that he ran in Houston in 1988, when a downturn in oil left thousands underwater by 30 to 40 percent.

One can only wonder why more banks aren't trying Ranieri's approach, rather than forcing millions of people into foreclosure and then taking a significant loss when trying to sell what is now a beaten asset. Often by the time the bank can foreclose -- a process that takes an average of more than a year -- the house is in such bad shape that the asset is worth much less as a distressed property. Plus, the foreclosure process probably cost the bank $50,000 or more.

Ranieri is not a saint. In fact, he's known as one of the fathers of the mortgage-backed securities that got us into this mess in the first place.The financier is credited with inventing these securities at Salomon Brothers in the 1980s. "I do feel guilty," he told Fortune in a December 2009 article. "I wasn't out to invent the biggest floating craps game of all time, but that's what happened."

But he doesn't think that the packaging of mortgage-backed securities created the problem. He instead blames the "affordability products," like low teaser rates and negative-amortization loans, that were pushed on people who really couldn't afford to buy homes.

The borrowers who Ranieri works with today already have been so beaten down by the system that he must give them an incentive to even call back one of his debt-workout specialists. He'll sometimes send a FedEx package containing a gift-card that can only be activated if the homeowner calls.

What's more, he doesn't only look at a person's mortgage, but at their entire debt situation. If necessary, he'll even pay off some other debt to help the borrower make mortgage payments. His goal is to get the asset to the point of performing so that he can sell it. If paying off other debt is what it takes, he'll do it.

Ranieri has had so much success that he says only 7 percent of homeowners helped by his specialists redefault. HAMP redefaults are running closer to 25 percent after six months.

So if you get a call from someone who says that he'll lower your mortgage principal, find out if he's from the flock of vultures who are truly helping homeowners.

Lita Epstein has written more than 25 books including "The 250 Questions You Should Ask to Avoid Foreclosure" and "The Complete Idiot's Guide to Personal Bankruptcy."

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