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Wall Street Moving Into the Business of Loan Modifications

Adam Rust's picture

Posted March 3, 2015

Pretium Mortgage Partners is a venture led by a manager who once led the Goldman Sachs' subprime mortgage division. A 2014 article in the New York Times says that Mullen set out to raise $1 billion to fund the project, but a report to the SEC suggests that they were only able to attract about $312.7 million. 

Bayview Acquisition LLC is a division of a subsidiary of the Blackstone Group. I recently read that Blackstone has some relationship, either as a direct investor or as a partner with some management relationship, to one-seventh of the world's financial assets. 

Pretium Mortgage Partners purchase two portfolios with a combined value of $289 million and a loan-to-value ratio of 106.3 percent. Bayview Acquisition LLC purchased a pool of 468 loans with a face value of $102.4 million and a loan-to-value ratio of 100 percent. 

But those LTVs are about the sanest aspect of these properties. On average, these loans have been delinquent for three years. 

Pretium (means "value" in Latin) is more specific on how it plans to work with those loans. According to the company, their strategy is to "enter businesses and markets characterized by inefficiencies and where we have a well-defined competitive edge driven by our team's of our strategies focuses on investment in and management of single-family residential real estate, while other strategies focus on the purchase of non-performing residential whole loans and re-performing loans and the execution of various loss mitigation strategies in order to enhance their value."  

Pretium owns more than 12,000 rental homes. But these loans aren't destined for that strategy. Rather, it looks like Pretium intends to take loan modification to scale. I suppose that is possible, although on-the-ground evidence seems to say that loan modification makes for a lot of long days. That said, Pretium could easily exceed the results that are currently being achieved by the largest servicers. In fact, all it would take to distance themselves from their competition would be to get rid of their fax machine. Loan mods are the last business that seems to run on the rails of faxes. 

Now those Wall Street financiers will have to get involved in the muddy details of loan modifications. The firms are obligated to try to make mods prior to going to short sale or a deed in lieu of foreclosure. Moreover, there is an expectation that the companies will try to sell to owner-occupants and non-profits before working with investors.  

In its most recent report, Treasury listed Bayview as a HAMP participant. To the point about the ability of these firms to overcome "inefficiencies," it appears that there is some room to improve upon the work of the larger servicers. In the 3rd quarter of 2014, Treasury said that each of the seven largest servicers could do better. In fact, with five of them, Treasury said that moderate improvement was needed. Only Bank of America and JPMorgan Chase recieved a "minor improvement needed" score. When a servicer recieves a moderate improvement needed grade, Treasury can withhold financial incentives.

These instances are not the only examples of Wall Street's appetite for the back end of the housing bubble. Lewis Ranieri, a trader who help to create the process of mortgage bond securitization, has managed a distressed mortgage fund for over six years. 

Both Pretium and Bayview will depend upon the services of the Department of Housing and Urban Development. HUD provides funding for the housing counselors that will be on the other end of many of those future loan modifications. In North Carolina, the number of HUD-housing counseling agencies is shrinking. That is not because HUD is pulling back on support. Instead, the problem lies with the political winds in our state government. Most of those agencies rely on a variety of income streams, and many originate from state budgets. Traditionally, those dollars flow through a small group of intermediaries. Owing to their left-leaning affiliations, our GA has eliminated their funding. If Pretium and Bayview plan to work in North Carolina, they will want to have housing counselors at their disposal. Without a counselor, a lot of borrowers struggle to generate the paperwork necessary to comply with a program like HAMP.