Louis Ragusa, who hasn’t paid his mortgage in two years, says he now has a chance to save his Blackwood, New Jersey, home from foreclosure after a hedge fund bought the loan.
American Homeowner Preservation, a Chicago-based investment firm, purchased the mortgage for less than half of what Ragusa owed. Chief Executive Officer Jorge Newbery called the father of three in August with an offer: Pay $5,000 and the company will drop the foreclosure case and erase the more than $100,000 of unpaid principal and penalties amassed.
“They’re a lot more flexible than a bank,” said Ragusa, 48, who ran into financial trouble after losing his job in collections for a cable company in 2007. “They can work with you because they’re a private company and they can basically set their own rules.”
Investors from American Homeowner Preservation to Neuberger Berman Group LLC are accumulating delinquent home loans in New Jersey and New York as distressed-property deals dwindle in much of the U.S. Their strategy is often to persuade homeowners to settle or even pay them to leave, circumventing a court process for foreclosures that has led to the biggest backlogs of nonperforming mortgages in the country.
The firms are making deep cuts to loan balances so borrowers can afford to pay again and the mortgages can be sold as more valuable “performing” notes. Another strategy is to offer thousands of dollars to those who agree to hand over keys without a fight. While borrowers seeking foreclosure alternatives from large banks have complained of lengthy processes and lost paperwork, Newbery says his company requires little or no documentation to approve a sale or loan workout.
“It’s a shortcut to get to the finish line,” said Newbery, whose company owns about 1,000 loans and is in the process of buying another 2,700 mortgages. “You don’t have to litigate with us to get a good deal. We’ll give you the good deal up front.”
Lenders are selling pools of soured mortgages as they face new regulations that make bad debt more expensive to hold. Banks sold $34.7 billion in nonperforming loans last year, up from $13.1 billion in 2012, according to Mission Capital Advisors, a New York-based real estate loan broker. Jamie Dimon, chairman and chief executive officer of JPMorgan Chase & Co., last month called mortgage servicing and production “the most painful business ever.”
“If I had a choice, I would never be in default servicing again,” he said at a presentation for investors. “I would tell anyone who’s got a mortgage with us, ‘You’re 60 days late, we’re selling the mortgage, and we don’t want to do any business with you anymore.’ It’s just far too painful.”
The loan packages now available to buyers have a large share of mortgages in areas such as New York and New Jersey where courts oversee foreclosures, said Terry Glomski, managing director at Neuberger Berman, which oversees about 10,000 nonperforming home loans. That’s making deals more plentiful even as investors prefer to buy in nonjudicial states because the eviction process is faster and more predictable, he said.
A delinquent mortgage in New Jersey will cost about 60 percent of the property’s current value, compared with as much as 80 percent for a similar loan in California, a nonjudicial state, according to Derek Katz, managing director of Denver-based MountainView Capital Holdings, a residential whole-loan investor and sale adviser.
Some large funds may buy geographically diverse portfolios and then sell loans in New York and New Jersey to local note buyers who specialize in working out mortgages in the slow-moving judicial states, said Kristopher Pilles, a Riverhead, New York-based real estate broker whose clients are now evenly split between large lenders and funds that own mortgages.
More than a third of the 58,000 loans that the Department of Housing and Urban Development auctioned last year were in Florida, New Jersey and New York, the states with the longest foreclosure timelines, according to an analysis of government data by RealtyTrac. About half of a $390 million offering by JPMorgan last month were loans in New York and New Jersey, where it takes three years on average to seize a house.
“All of us in the nonperforming-loan business have to deal with the fact that, as time passes, there’s going to be more and more judicial loans as compared to nonjudicial loans, so we have to value them as best we can and we need to resolve them,” said Glomski. About a third of the nonperforming loans New York-based Neuberger Berman owns are in judicial states.
Judicial states, including New York, New Jersey, Florida and Maryland, require that every foreclosure be approved by a court, slowing the process.
Other funds buying the delinquent loans include Bayview Asset Management; mortgage-bond pioneer Lewis Ranieri’s Selene Finance; MCM Capital Partners/Oak Hill Advisors; Pacific Investment Management Co.; Angelo Gordon & Co.; and Pennymac Financial Services Inc., according to three people with knowledge of the industry, who asked not to be named because the transactions are private.
“We strive to keep borrowers in their homes whenever possible,” said Chris Oltmann, a spokesman for Moorpark, California-based Pennymac, which services distressed loans with unpaid principal balances totaling $5.9 billion. The company has worked foreclosure alternatives such as short sales and principal writedowns for about two-thirds of its delinquent loans, he said.
Spokesmen for Bayview, Selene, MCM Capital and Angelo Gordon declined to comment. A Pimco spokesman didn’t return phone calls seeking comment.
New Jersey has surpassed Florida in having the highest share of residential mortgages that are seriously delinquent or in foreclosure, with New York third, a Mortgage Bankers Association report showed last month. By contrast, hard-hit areas such as Arizona and California have some of the lowest levels of delinquencies after allowing banks to quickly foreclose after home prices started to crash in 2006.
The backlog is weighing on housing values because of the prospect of a rising supply of distressed homes on the market. While U.S. prices jumped 12 percent in January from a year ago, they rose only 8 percent in New York and 6.6 percent in New Jersey and Maryland, according to CoreLogic Inc.
New Jersey ranked second-to-last in a gauge of U.S. housing-market stability, according to a Freddie Mac index measuring the 50 states and Washington, D.C. The index weighs criteria including mortgage applications, income ratios and proportion of on-time mortgage payments.
Hedge funds and investment firms buying the delinquent loans may help to limit the damage by sopping up extra inventory, according to Pilles.
“Without these buyers a lot of these properties would still be in the courts,” he said.
The loan buyers want to reduce delays to maximize profits, said Kinglsey Greenland, president and CEO of Debt Exchange Inc., a Boston-based loan-auction service known as Debtx. The firm has sold 47,000 loans for HUD since 2012.
“Once it gets out of the bank’s hands, where it’s in loss-mitigation mode, and into someone else’s hands, where it’s in a profit mode, speed is of the essence so things happen faster,” Greenland said.
Large banks have had success in working out deals with homeowners, according to Bob Davis, executive vice president for the American Bankers Association in Washington. Almost 7 million modifications have been completed since 2007, he said.
Citigroup Inc., Bank of America Corp., Wells Fargo & Co. and JPMorgan provided $50 billion in relief to more than 600,000 families, a court-appointed monitor of the 2012 settlement with the large servicers said last week. About $20 billion of that was credited toward meeting the legal settlement over botched foreclosures and was handed out mostly in the form of debt forgiveness such as approving sales for less than what is owed and help with refinancing.
“It’s unrealistic to expect, just because I’m private equity, my communications are going to work well, consumers are going to work with me and my systems are never going to make a mistake,” Davis said. “They’ll do a good job. Big banks have done a good job. The job will never be perfect because you’re dealing with human nature and human problems.”
For investors, foreclosing or paying a borrower to move out may often be more cost efficient than time-consuming loan workouts, said Diane Thompson, attorney with the National Consumer Law Center based in Boston.
Seizing a property can be especially valuable to a fund in a market where home prices are rising, Thompson said. Another concern is that institutional investors aren’t subject to the same level of regulatory scrutiny as large banks, making it more difficult to police them, she said.
“It’s likely that at least some homeowners will find themselves losing their homes who should have been able to keep them,” she said. “Results will vary. Some will be getting good modifications they wouldn’t have gotten otherwise. For many people expectations will be raised and they’ll likely be disappointed.”
American Homeowner Preservation gives homeowners three options, and borrowers often choose as if ordering from a menu, CEO Newbery said. They can pay off the mortgage by coming up with 90 percent of the property’s current value; accept a modified loan with a principal cut; or take between $1,000 and $5,000, depending on the home’s value, to hand over the keys or cooperate with a sale.
Newbery said his company started in 2008 as a nonprofit organization, and has retained its mission of keeping borrowers in their homes whenever possible. In Ragusa’s case, the firm can make a solid profit even after lowering his payment and the amount he owes, Newbery said.
American Homeowner Preservation purchased Ragusa’s mortgage for $134,000 from a fund that had acquired it from Citigroup. Ragusa is now trying to come up with the $10,000 the firm is seeking in exchange for restructuring the loan, a payment that has increased from the original offer.
Ragusa, who now works in sales at the cable company for less than half his previous salary, owes $308,000 on his mortgage for the three-bedroom house, plus two years of payments. The balance will be knocked down to $211,500 if he makes the deal with American Homeowner Preservation.
“I’m sure the hedge funds are going to do a better job than banks in pushing these through, because they’ve had five years and have not done anything,” Newbery said. “The loans going into private hands and away from banks is a big step forward to resolving families in limbo.’