As millions of Americans struggle to hold on to their homes, Wall Street has found a way to make money from the mortgage mess.
Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.
But as part of these deals, the mortgages are being refinanced through lenders that work with US government agencies such as the Federal Housing Administration (FHA). This enables the funds to pocket sizeable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.
Got lucky: Steven and Marisela Alva were grateful for new loan terms on their home in California. J. Emilio Flores / NYT
While homeowners save money, the arrangement shifts nearly all the risk for the loans to the government—and, ultimately, taxpayers—at a time when Americans are falling behind on their mortgage payments in record numbers.
For instance, a fund might offer to pay $40 million (Rs186.4 crore) for a $100 million block of mortgages from a bank in distress. Then the fund could arrange to have some of those loans refinanced into mortgages backed by an agency such as FHA and then sold to an agency such as Ginnie Mae, a government-owned corporation within the department of housing and urban development, which guarantees investors the timely payment of principal and interest on mortgage-backed securities backed by federally insured or guaranteed loans. The trick is to persuade the homeowners to refinance those mortgages, by offering to reduce the amounts the?homeowners owe.
The profit comes when the refinancings reach at least the $40 million that the fund paid for the block of loans.
The strategy has created an unusual alliance between Wall Street funds that specialize in troubled investments—the industry calls them “vulture” funds—and American homeowners.
But the transactions also add to the potential burden on government agencies, particularly FHA, which has lately taken on an outsize role in the housing market and, some fear, may eventually need to be bailed out at taxpayer expense.
These new mortgage investors thrive in the shadows. Typically, the funds employ intermediaries to contact homeowners and arrange for mortgages to be refinanced.
Homeowners often have no idea who their Wall Street benefactors are. Federal housing officials, too, are in the dark.
Policymakers have encouraged investors and banks to put more consumers into government-backed loans. The total value of these transactions from hedge funds is small compared with the overall housing market.
Housing experts warn that the financial players involved—the investment funds, their intermediaries and certain FHA-approved lenders—have a financial incentive to put as many loans as possible into the government’s hands.
“From the borrower’s point of view, landing in a hedge fund or private equity fund that’s willing to write down principal is a gift,” said Howard Glaser, a financial industry consultant and former official at the department of housing and urban development.
He went on: “From the systemic point of view, there is something disturbing about investors that had substantial short-term profit in backing toxic loans now swooping down to make another profit on cleaning up that mess.”
Steven and Marisela Alva say they do not know who helped them with their mortgage. All they know is that they feel blessed.
Last December, the couple got a letter saying that a firm had purchased the mortgage on their home in Pico Rivera, California, from Chase Home Finance for less than its original value. “We want to share this discount with you,” the letter said.
“I couldn’t believe it,” said Alva, a 62-year-old janitor and father of three. “I kept thinking to myself, ‘Something is wrong, something is wrong. This sounds too good.’”
But it was true. The balance on the Alvas’ mortgage was ultimately reduced to $314,000 from $440,000.
The firm behind the reduction remains a mystery. The Alvas’ new loan, backed by FHA, was made by Primary Residential Mortgage, a lender based in Utah. But the letter came from a company called MCM Capital Partners.
In the letter, MCM said the couple’s loan was owned by something called MCMCap Homeowners’ Advantage Trust III. But MCM’s co-founders said in an interview that MCM does not own any mortgages. They would not reveal the investor that owned the Alvas’ loan because they had agreed to keep that client’s identity confidential.
Michael Niccolini, an MCM founder, said: “We are changing people’s lives.”
©2009/THE NEW YORK TIMES