Mortgage Firm Citadel Cool to Revival of Risky-Loan SecuritiesJody Shenn
While many of the lenders and investment firms seeking to profit from higher-risk mortgages are working to revive the business of bundling such loans into bonds, one of the biggest players is in no rush to see that happen.
Citadel Servicing Corp. is using other types of financing and is content to rely on that borrowing for now, Chief Executive Officer Daniel Perl said. The company, which tripled its originations last year to about $150 million, is targeting $400 million to $500 million this year, he said.
“We’re sitting right now on a reasonable amount of loans and I doubt we’ll securitize any of it,” he said in a telephone interview from Irvine, California. “If the financing’s already there, why deal with it?”
His comments contrast with those from Seer Capital Management and Angel Oak Capital, which said last month they expect to find financing this year for riskier new mortgages in the bond market, a practice that disappeared after similar securities fueled the 2008 financial crisis. Loan holders can boost potential returns by selling bonds backed by the debt or using it as collateral for borrowing from lenders such as banks.
Other companies investing in riskier, sometimes called nonprime, mortgages unable to qualify for government-backed programs and eyeing the securitization market include private-equity firm Lone Star Funds and real-estate investment trust Two Harbors Investment Corp. JPMorgan Chase & Co. analysts forecast as much as $5 billion of bond issuance backed by the loans is possible in 2015 -- a pittance compared with the $2 trillion of securities tied to risky loans without federal backing created during the housing bubble.
Citadel Servicing, which isn’t affiliated with hedge fund Citadel Advisors, received an investment last year from Pacific Investment Management Co., industry newsletter Inside Mortgage Finance has reported.
Perl declined to comment on its backers or the terms of its borrowing. Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, didn’t return an e-mail seeking comment.
A slew of investment firms are targeting riskier mortgages in a bid to earn higher returns in a world in which home lenders are more cautious and central banks are suppressing yields on more traditional debt.
One product that Citadel Servicing offers allows for credit scores as low as 500, on a scale from 300 to 850, if a borrower makes a down payment of at least 35 percent, according to its website. The interest rate on that loan would be 9.25 percent. More credit-worthy borrowers can put down as little as 15 percent, while paying about 8 percent.
The company, which was founded in 2003, sells some of the mortgages it makes and co-invests in others with outside firms, Perl said. It services, or manages, all of the loans it originates itself, he said.
Citadel Servicing doesn’t see much opportunity in making loans that fall just short of what taxpayer-backed Fannie Mae and Freddie Mac or banks will accept, Perl said. It’s seeing a lot more lenders and investment firms chasing the types that his firm underwrites and funds due to their yields, but Perl said he thinks it’s going to be harder than they expect.
The mortgages “are a lot more work and require an underwriter to be able to put pencil to paper” in the analysis of the borrowers, he said.
Without the automated loan-vetting software that’s used for conventional loans, Citadel Servicing’s underwriters spend more time on each file, leaving them able to handle about a third as many each, he said. It has about 80 employees, up from about 30 at the start of last year.
While the mortgages it makes may be riskier in some ways, Perl said that the company saw just four of its loans default last year, representing less than 0.4 percent of the debt it oversees. Three of those paid off without a loss and it anticipates that will also happen with the other one, he said.
“The reason for that is quite simple: the people had equity in their properties,” he said.
Borrowers with larger down payments or home-equity cushions after refinancings can sell their homes instead of facing foreclosures when they run into trouble such as job losses, divorce or illness.