United Feature Syndicate Newspaper Enterprise Association

WASHINGTON -- A window of opportunity may soon open for troubled owners who have found themselves in trouble because they opted for one of several kinds of so-called "toxic" mortgages to finance their homes.

As long as you can requalify under today's more stringent lending standards, the investors who own your mortgage could come calling with an offer to recast your loan with more favorable terms. They may be willing to cut your interest rate, for example, or perhaps they'll reduce your loan's balance.

But even if you don't qualify, they still may be able to let you off the hook by allowing 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, Fla.-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 nonperforming loans off the books, certainly SOME investors are moving as fast as they can to rework the loans so borrowers will once again make their payments in a timely fashion.

But there is no shortage of companies looking to plum the bottom of the housing market by purchasing nonperforming mortgages from investors and then trying to turn them into performing assets that can be resold to other investors. Even veteran investment banker Lewis Ranieri, the man credited with creating mortgage-backed securities in the 1980s, 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. But these are anything but normal times.

Now, with millions of borrowers in default, the value of nonperforming loans on the secondary market has taken an extraordinary nose dive, sometimes to as little as 25 to 30 cents per dollar of outstanding balance. And at that price, the new owners of these mortgages have much greater latitude when working with delinquent borrowers.

Jacob Benaroya, president and managing partner of Biltmore Capital Group, a New York-based bulk buyer and seller of nonperforming mortgage portfolios secured by residential properties, 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. But he is much more glib when it comes to discussing his company's strategy.

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

The Wall Street executive says firms like his are much better equipped to deal with problem borrowers than the typical investor or the servicing agent hired to administer their portfolios, which can include millions of mortgages. "Our advantage is that we deal only with nonperforming loans," he says.

While most servicing companies are good at handling loans that pay on time, they aren't so good when it comes to delinquencies, and right now they are overwhelmed. In some portfolios, three out of every 10 loans are delinquent, and traditional servicers just aren't able to handle that amount of problems.

On the other hand, with firms like his, Benaroya says, "Default servicing is our only specialty."

"Our well-trained, mission-committed associates use state-of-the-art technology to connect with borrowers in order to diagnose and remedy sub-performing mortgage assets with unparalleled loss-mitigation and asset-disposition strategies," says Louis Amaya, chief investment officer of National Asset Direct, a San Diego, Calif.-based purchaser of distressed loans.

Another thing these investors bring to the table is a long-term view. "We are backed by patient capital," says Sadie Gurley, managing director of New York's Marathon Asset Management, a name that speaks to the company's focus. "We have no plans short term other than to get these loans performing again."

All mortgage investors have the ability to 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 much better terms to folks who want to remain in their homes and have the ability to pay going forward.

Opportunity investors also make it easier for borrowers to move on if they can't or don't want to stay. Typically, these are people whose homes are no longer worth what they paid for them, or perhaps even less than what they still owe.

Indeed, once you have lined up a "short sale" buyer -- that is, someone who is willing to buy your place but only at a price less than what you owe on the mortgage -- Gurley says that as long as the deal is "realistic," she can give you an answer within 24 to 48 hours.

That compares to the weeks or months it sometimes take the typical loan servicer to respond with a yea or nay. And, as Gurley points out, "by that time, your buyer is usually gone."

So should troubled borrowers simply wait for their loans to be sold in hopes the new owner will coming riding to their rescue? Absolutely not, Benaroya says. On the contrary, his advice is to pound and pound hard on your current lender for relief. "Be proactive," he says.

In other words, don't hide. 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," according to the Biltmore Capital executive. "But now's not the time. Now the earlier you step up, the more options you have."

When and if your loan changes hands, you can expect the new lender to contact you. But scam artists -- whose goal is to con you out of your home by saying they now own your loan -- may also contact you. So beware of someone who says he now owns your loan.

In a legitimate loan transfer, you should receive a goodbye letter from your old servicer or lender as well as a hello letter a few weeks later from your loan's new owner. Both letters should contain information with regard to your loan amount, interest rate and other loan terms.

The new owner may also seek information about your job and income in an effort to ascertain whether you can afford to go on. But if the letter asks for your Social Security, bank-account or credit-card numbers, back off, Gurley warns. "We already have that information."

In the meantime, some experts say to keep making your house payments if you can, while others say the best way to get the lender's attention is to stop paying. Benaroya doesn't recommend the latter, saying it is terribly damaging to your credit. But so is a foreclosure, so there isn't much difference.

If you can pay but still elect to stop, don't spend the money. Instead, put it in a separate account so you'll have the cash on hand to bring the loan current when and if that becomes necessary.

If you are having difficulty making your house payment, Benaroya suggests prioritizing your spending. After health care, keeping your home should be your first priority, over and above unsecured debt such as your credit cards. MasterCard can't take your house, but your mortgage lender can.

Also review your finances to see what discretionary spending can be eliminated or put on hold, such as cable television, club memberships and dining out.

Another possibility is to put your other assets to work for you. Do you really need a second or third car? Can jewelry be sold for enough to cover a house payment or two? Can someone else in the household bring in additional income?

"Even if these efforts don't significantly increase your available cash," Benaroya says, "they demonstrate to your lender that you are willing to make sacrifices to keep you home."

Lew Sichelman has been covering real estate for more than 30 years. He is a regular contributor to numerous shelter magazines and housing and housing finance industry publications.
Copyright 2008, United Feature Syndicate, Inc.
United Feature Syndicate