Troubled loans get recast, sold

United Feature Syndicate

June 8, 2008

A window of opportunity may soon open for owners who have found themselves in trouble because of the mortgages they took out to finance their homes.

As long as you can requalify under today's more stringent lending standards, you may have a shot to refinance under more favorable terms. Investors who own your mortgage may be willing to cut your interest rate or reduce the balance.

But even if you don't qualify, they still may allow you to sell the place for less than what you owe.

"There's not an investment bank in the country that's not using this strategy," says Jeffrey Taylor, co-founder of Digital Risk, an Orlando-based firm that offers risk-mitigation and due-diligence services to the financial industry. "It's the creative way to liquidity."

That may be a bit of an exaggeration. To move their non-performers off the books, some investors are reworking loans so borrowers will be able to make payments in a timely fashion.

And though many investors are eager to rework wayward loans, there is no shortage of companies looking to purchase the non-performing mortgages from investors and then trying to turn them into performing assets that can be resold. Even veteran investment banker Lewis Ranieri, the man credited with creating mortgage-backed securities, has formed an opportunity fund to buy residential loans.

In normal times, investors can usually purchase slow- or no-pay mortgages for 70 to 75 cents on the dollar. Now, with millions of borrowers in default, the value of non-performing loans is sometimes as little as 25 to 30 cents per dollar of outstanding balance.

Jacob Benaroya, president and managing partner of Biltmore Capital Group, a New York-based bulk buyer and seller of non-performing residential mortgage portfolios, won't reveal what he is paying for delinquent loans, saying only that the pricing "has opened up a little bit" over the past few months.

"We try to turn non-performing loans into reperforming assets," Benaroya says. "Then, after some 'seasoning'—say, six months of on-time payments—we can resell the loans or continue collecting the payment."

The Wall Street executive says firms like his are much better equipped to deal with problem borrowers than the typical investor or mortgage servicer. In some portfolios, which can include millions of mortgages, three out of every 10 are delinquent.

Another thing these investors bring is a long-term view. "We are backed by patient capital," says Sadie Gurley, managing director of New York's Marathon Asset Management. All mortgage investors can cut deals with borrowers who want to remain in their homes. But, because companies like Biltmore and Marathon have a lot less invested, they can offer better terms to struggling home owners.

Indeed, once you have lined up a "short sale" buyer, Gurley says she can give you an answer within 24 to 48 hours as long as the deal is "realistic."

That compares to the weeks or months it can take the typical loan servicer to respond.

But Benaroya points out that borrowers should be proactive, even if one of these outcomes may be an option.

Respond to phone calls and open the mail. "There's always a tendency to circle the wagons when money is owed and debt collectors are calling," said the Biltmore Capital executive. "But now's not the time."

Write to Lew Sichelman c/o Chicago Tribune, Chicago Homes, 435 N. Michigan Ave., 4th floor, Chicago IL 60611. Or e-mail him at realestate@tribune.com. Sorry, he cannot make personal replies. Answers will be supplied only through the newspaper.