Distressed loan funds investing in servicers to maximize recovery
Hedge funds entering the distressed whole mortgage market are spending a lot of energy and capital to purchase or set up servicers with experience in loss mitigation, rather than just collections.
That’s because “the best value is keeping the borrower in the house and keeping them making payments”, said Sadie Gurley, senior portfolio manager for Marathon Asset Management’s distressed subprime fund. “The last thing you want to do is foreclose on a house,” she said. This is why “it’s a necessity” to have special servicing when dealing with homeowners under pressure from or already behind on their mortgage payments. Last February, Marathon began setting up its own special servicer -- Marix Servicing in Phoenix, Arizona -- specifically to service the fund’s portfolio of distressed whole subprime mortgages. The first loans came onboard in September 2007.
So far, Marathon has been extremely happy with the results from Marix’s special servicing, Gurley said, with a substantial number of the 30-to-90 day delinquent loan borrowers now on repayment plans and just 11 properties in REO, or "a tiny fraction of our total portfolio", she said.
In a typical servicing model, because of the bureaucracy, there is no cohesive loss mitigation message, Gurley said. But with distressed loans, to prevent them from going to foreclosure, early intervention with a focus on loss mitigation, as opposed to merely collections, is essential, she said.
What Marix does differently from a typical large servicer is to ensure that every account goes through loss mitigation even before it proceeds into foreclosure, said Steve Paton, senior vice president of loan administration for Marix. In the servicing industry, it’s widely accepted that about 50% of accounts go to foreclosure with the borrower never having talked to the servicer, he said.
Loss mitigation is traditionally done on an exception basis, Paton said. That’s partly because it’s possible to work far more accounts per person in collections than through loss mitigation. Collecting is mostly making phone calls to borrowers, whereas loss mitigation requires re-underwriting a loan, he said.
But it’s in everyone’s best interest to find ways other than foreclosure to solve problems meeting loan payments, Paton said. For one thing, on average, there’s about a 10% to 15% difference in severity between loss mitigation and having a property become real-estate owned (REO) in a foreclosure, with foreclosure the greater severity. On a USD 200,000 property, that’s USD 20,000 to USD 30,000 more in losses if it goes to REO status, he said.
Hedge funds entering the distressed whole mortgage market are spending a lot of energy and capital to purchase or set up servicers with experience in loss mitigation, rather than just collections.
That’s because “the best value is keeping the borrower in the house and keeping them making payments”, said Sadie Gurley, senior portfolio manager for Marathon Asset Management’s distressed subprime fund. “The last thing you want to do is foreclose on a house,” she said. This is why “it’s a necessity” to have special servicing when dealing with homeowners under pressure from or already behind on their mortgage payments. Last February, Marathon began setting up its own special servicer -- Marix Servicing in Phoenix, Arizona -- specifically to service the fund’s portfolio of distressed whole subprime mortgages. The first loans came onboard in September 2007.
So far, Marathon has been extremely happy with the results from Marix’s special servicing, Gurley said, with a substantial number of the 30-to-90 day delinquent loan borrowers now on repayment plans and just 11 properties in REO, or "a tiny fraction of our total portfolio", she said.
In a typical servicing model, because of the bureaucracy, there is no cohesive loss mitigation message, Gurley said. But with distressed loans, to prevent them from going to foreclosure, early intervention with a focus on loss mitigation, as opposed to merely collections, is essential, she said.
What Marix does differently from a typical large servicer is to ensure that every account goes through loss mitigation even before it proceeds into foreclosure, said Steve Paton, senior vice president of loan administration for Marix. In the servicing industry, it’s widely accepted that about 50% of accounts go to foreclosure with the borrower never having talked to the servicer, he said.
Loss mitigation is traditionally done on an exception basis, Paton said. That’s partly because it’s possible to work far more accounts per person in collections than through loss mitigation. Collecting is mostly making phone calls to borrowers, whereas loss mitigation requires re-underwriting a loan, he said.
But it’s in everyone’s best interest to find ways other than foreclosure to solve problems meeting loan payments, Paton said. For one thing, on average, there’s about a 10% to 15% difference in severity between loss mitigation and having a property become real-estate owned (REO) in a foreclosure, with foreclosure the greater severity. On a USD 200,000 property, that’s USD 20,000 to USD 30,000 more in losses if it goes to REO status, he said.
The techniques to maximize the value of distressed subprime loans are different than in other parts of the mortgage market, said Dave Vida, president of Plano, Texas-based Strategic Recovery Group. The company handles both special servicing and debt collection. In July 2007, American Residential Equities, one of the largest investors in nonperforming residential mortgages, became a majority owner of SRG through a passive investment.
“Our approach is really to get ahead of the event that causes the default,” Vida said. “It’s really about having a custom strategy based on asset risk and the individual risk.” According to Vida, SRG has developed models around both types of risk. “You might have a high risk asset and a low-risk consumer,” he said. A servicer should handle this situation differently than a low risk asset and a high risk consumer. Part of the due diligence involves examining consumer behavior, such as whether a borrower is a habitual check bouncer or has a high frequency of “non-sufficient funds”, Vida said.
Because distressed loans require this kind of attention, as an investor in these loans, “you probably need to have your own servicer,” said Jeffrey Kirsch, chief executive of ARE Asset Management. In addition, the larger, non-specialized servicers today are most likely challenged by the number of nonperforming loans they are servicing, he said. Some of the larger servicers were probably caught off guard by the number of loans that stopped performing, he added.
Rather than wait for an overburdened servicer to develop a loss mitigation strategy for subprime borrowers, it makes sense to start with one that has expertise in that area and can focus on a particular fund’s needs, Kirsch said.
