• School has indirect investments in firms seeking foreclosure
  • Nationstar, Ocwen in funds held by university’s endowment

A photograph of Frank Douglass’s Victorian house -- painted sage green with white trim -- is displayed on a website about Yale University’s employee homebuyer program.

Now Douglass, a 63-year-old custodian, has fallen behind on his mortgage payments after two job-related injuries and is facing foreclosure by a servicing company in which Yale’s endowment is an indirect investor.

Douglass in front of his home in New Haven, Connecticut.
Douglass in front of his home in New Haven, Connecticut.
Photographer: Chris Goodney/Bloomberg

About 30 percent of Yale’s $25.6 billion endowment is targeted for investment in private equity. One of its fund managers, Fortress Investment Group LLC, owns more than half of Nationstar Mortgage Holdings Inc., which services Douglass’s mortgage. A hedge fund Yale invests in, Kingstown Capital Management, has a stake in another servicing company, Ocwen Financial Corp. Both mortgage firms have been investigated for unfair practices and ordered to provide relief to some homeowners. In Douglass’s case, a court-appointed mediator said Nationstar didn’t follow guidelines in denying a loan modification last year.

“Yale helped me buy my house, and now they’re investing in the company that’s trying to take my house from me,” said Douglass, who has worked for the Ivy League university for 27 years, starting out as a pot washer in one of the dining halls. “I just don’t get it.”

Indirect Investments

While much of the country has moved beyond the mortgage crisis, it’s still an issue in New Haven, Connecticut, where foreclosures have spread throughout the city dominated by Yale. The indirect investments in Nationstar and Ocwen have spurred some critics to say that Yale has to do more to ensure the endowment’s efforts to make money don’t conflict with its ethics.

“Yale can do the right thing and exert influence over their managers and change the way they do business,” said Aaron Greenberg, the head of a Yale graduate student union who helped research the endowment, discovered the connection to the mortgage servicers and took the matter to members of New Haven’s Board of Alders, on which he and Douglass sit. “Yale should bring its investments back in line with its values.”

Tom Conroy, a university spokesman, said that while he couldn’t comment on specific investments, “Yale is an ethical investor and was a pioneer on the issue.” The school first outlined that position in 1972, creating procedures for considering factors beyond economic return when making investment decisions. “Yale applies its ethical-investment policy to public and private positions alike,” he said.

Whether running afoul of regulators makes mortgage-servicers unethical is a matter for the Yale community to decide. As activists at that school and elsewhere dig into the private equity holdings of endowments, they’re bound to discover many companies they consider distasteful, from gun manufacturers to for-profit prison operators. With more than half of Yale’s endowment in private equity, hedge funds and other illiquid assets, it has become increasingly difficult for the school to control where its dollars go.

Passive Partners

Even if Yale wanted to divest, as it did with 17 companies doing business in South Africa during the apartheid era, that might not be so easy. Those investments were mostly in stocks. Private equity investors are two steps removed. They’re limited partners that relinquish any say in decisions about what companies are selected by the general partners and can’t sell underlying positions. If they want to exit the fund, they have to get permission from the general partner, and selling can be at a significant discount. Hedge fund investments can be locked up for as long as three years.

“Limited partners are passive, and they need to be passive,” said Michael Wolitzer, a partner at law firm Simpson Thacher & Bartlett who specializes in private equity partnerships. “There are some examples historically where large institutional investors have used their position to express a view regarding the activities of the underlying portfolio companies. That is the rare exception.”

One such exception involved Cerberus Capital Management. After a near-revolt by limited partners over its holding of gun maker Freedom Group, the private equity firm arranged for the company to buy out investors who wanted to exit the firearms business following the shooting deaths of 20 children and six adults at Sandy Hook Elementary School in Newtown, Connecticut, about 25 miles from New Haven.

Yale’s endowment, the nation’s second largest, has appealed to outside managers to avoid investments in firms that don’t reduce greenhouse-gas emissions, resulting in two funds selling less than $10 million in investments in a publicly traded coal company and two oil-sands producers, the university said in April.

Swensen Shift

Under Chief Investment Officer David Swensen, who started in 1985, Yale’s endowment was among the first to shift its asset allocation away from individual stocks and bonds to more illiquid assets such as private equity and hedge funds. Swensen’s first foray into private equity was in 1986, when he set a target allocation of 5 percent, according to Yale data. Last year, more than half the endowment was in such alternative assets.

Yale’s private equity program has boosted returns and made its endowment a model for other universities. Over a 20-year period, those investments produced an annualized return of 36 percent, the school said in a 2014 report, the last time the endowment provided figures for that category.

College endowments generate revenue to help support schools’ endeavors, from professor salaries to financial aid. At Yale, the endowment funds about one-third of the university’s budget. Investment returns, which aren’t taxed, were $2.6 billion in the most recent year.

Fortress Fund

In 2004, the university allocated $100 million of its then-$12.7 billion endowment to Fortress’s Fund III, a U.S. Securities and Exchange Commission filing shows. The private equity firm bought Lewisville, Texas-based Nationstar in 2006 and took it public six years later. Fortress retains a stake of more than 60 percent. Yale was still an investor in the fund as of late April, according to a report by research firm Preqin seen by Bloomberg.

Yale also invested in Fortress’s Fund IV, which owns Nationstar shares, as did the University of Texas and the University of Michigan, according to filings. Spokesmen for those schools declined to comment.

Yale had $216 million in Kingstown as of June 2015 through a limited partnership called Ktown, which appears on a university tax filing as one of almost 200 entities created mostly for investment purposes. Ktown, managed by Kingstown but 97 percent owned by Yale, holds almost 2 percent of Ocwen’s shares, according to filings. Kingstown began investing in Ocwen in 2014 and now owns about 10 percent of the Atlanta-based company. A Kingstown spokesman declined to comment.

Nationstar, Ocwen

Servicers such as Nationstar and Ocwen collect mortgage payments, process loan-modification requests and seek foreclosure when homeowners, including high-risk borrowers, fall behind on loans.

The Consumer Financial Protection Bureau and 49 states accused Ocwen in 2013 of engaging in “significant and systemic misconduct that occurred at every stage of the mortgage servicing process,” putting thousands at risk of losing their homes. The misconduct included taking advantage of homeowners with servicing shortcuts and unauthorized fees; deceiving consumers about foreclosure alternatives and improperly denied loan modifications; and engaging in illegal foreclosure practices, according to the complaint. Ocwen agreed to provide $2.1 billion in homeowner relief to settle the matter.

Nationstar agreed to make refunds of about $16.2 million to borrowers related to delays in approving modifications transferred from prior servicers between 2012 and February 2015, the company disclosed in a May regulatory filing. New York’s Department of Financial Services requested information in 2014 about the firm’s performance and staffing after receiving hundreds of consumer complaints about mortgage modifications, improper fees and lost paperwork. The agency is still examining the matter, according to its spokesman, Richard Loconte.

Nationstar has helped more than 600,000 distressed borrowers since 2010 with workout solutions including modifications and repayment plans, according to the company.

‘Not Perfect’

“We service more than 2.5 million customers, and our culture is built on a commitment to providing solutions for borrowers in need,” Chief Executive Officer Jay Bray said in an e-mailed statement. “The servicing books we have acquired from banks have seen a 50 percent improvement in delinquency rates. We are proud of these achievements but recognize that we are not perfect and that constant improvement is vital in a business where outcomes are so meaningful to individual borrowers and American communities.”

A spokesman for Fortress referred questions to Nationstar.

Fannie Mae, the government-backed company that buys and securitizes mortgages, gave Nationstar its highest rating for servicers last year, even though a Treasury Department report in March said Nationstar and Ocwen were among five companies that needed to make moderate improvements to performance.

A national monitor overseeing legal settlements said in April that Ocwen had exceeded its consumer-relief obligations, passing all metrics tested during the time period. The company said it has implemented a corrective action plan approved by the monitor related to borrower notification about denied modifications.

John Lovallo, an Ocwen spokesman, said the company has helped more than 625,000 families avoid foreclosure and is committed to finding ways to keep people in their homes.

“Ocwen’s goal is to help borrowers stay in their homes and avoid foreclosure whenever possible,” Lovallo said. “We do everything within our power to assist struggling homeowners when permitted under applicable agreements and guidelines.”

In Connecticut, Ocwen has granted more than 11,600 loan modifications and about $431 million in principal reductions, he said.

Homeowner ‘Heartache’

“Nationstar and Ocwen are still responsible for a lot of heartache that homeowners unnecessarily experience,” said Sarah White, a foreclosure-prevention attorney at the Connecticut Fair Housing Center who’s advising Douglass. “They have some responsibility for communities as a whole that have been slow to recover.”

White said Nationstar didn’t follow Federal Housing Administration guidelines when it denied Douglass’s request for a modification last year. Nationstar rejected the application on the grounds that it would have resulted in a higher monthly payment, even though the FHA, which insured Douglass’s loan, allows for such increases, White said. Howard Kane, a court-appointed mediator wrote in August that Nationstar’s modification package was missing pages and contained forms that weren’t required under FHA guidelines. The case is still in mediation, and the foreclosure motion is pending.

Members of the black and Hispanic caucus of New Haven’s Board of Alders have made foreclosures a priority and are looking at the role of nonbank servicers, according to Delores Colon, chair of the caucus and a public services assistant at Yale’s rare book library who has been employed by the university for 24 years.

“Mortgage servicers play a big role in determining whether struggling families keep or lose their homes,” said Colon, who bought a house in 2002 with assistance from Yale’s homebuyer program. “In our fight to end preventable foreclosures, we will have to contend with the fact that Yale University, an institution that has promoted home ownership in New Haven for decades, is invested in some of the largest mortgage-servicing companies.”

Foreclosure Threat

Douglass is one of more than 1,100 Yale employees, including faculty, clerical workers and maintenance staff, who have received home-buying assistance, usually in the form of an annual, taxable subsidy. The university has invested almost $30 million in the program, according to its website. It also offers free financial counseling for all employees, according to Conroy, the Yale spokesman.

Douglass said he didn’t think of approaching Yale when he ran into trouble with mortgage payments after carpal tunnel syndrome and a knee injury sidelined him from work.

“I love the place,” Douglass said of the two-family house on Elm Street that he bought in 2003 with the help of the university, which provided about $20,000 in assistance over a decade. “I don’t want to leave it.”

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