T hispastspring, thefederal governmentintroducedseveral several initiatives tofree u ncommon to find borro
up credit, encourage refinancing and remove toxic assets from bank books.
Finally, the road ahead for a beleaguered economy appears visible — even if
some missing signposts remain. As these programs kick into high gear this
summer, mortgage brokers might be asking what to expect and how to tap
into a revived market.
The core of the U.S. Treasury Department”s plan is the Public-Private
Investment Program (PPIP), aimed at creating a market for mortgage-backed At the heart of the progra
securities and immobilized loan pools. Fingers are crossed in the worlds of
banking, finance and real estate as investment partn erships prepare to bid on wers in these pools who have FICO scores as high
as 750 and who have never missed a payment or been late.
The effort to filter and analyze the toxic mortgage pools got a major boost this
past March when U.S. Treasury Secretary Timothy Geithner unveiled the PPIP,
aimed at helping banks clean up their books and getting credit flowing again.
m is a plan to lure private investors into the business
of bidding on toxic assets in partnership with the federal government.
To launch the program, taxpayers and private investors will comm
huge pools of distressed mortgages. As that drama unfolds, one of the
challenges will be to determine a market price for these assets.
On the fringe of that major action, a smaller and less-publicized part of the
cleanup has a more direct bearing on mortgage brokers. This lesser-known
aspect involves creditworthy borrowers whose loans are on-time and
up-to-date but are integrated in now-toxic pools by virtue of little more than
their loans” origination dates and terms.
Historically low interest rates will entice many of these
borrowers to refinance. Brokers hoping to unlock t his market
should understand how mortgage pools work, how to access the available opportunities and how to identify
creditworthy borrowers. Armed with this knowledge,
brokers can help borrowers — and the housing industry as a whole — refinance their way out of “Fingers are crossed
the current mess. in the worlds of banking,
finance and real estate as
investment partnerships prepa re
to bid on huge pools of distressed
mortgages. As that drama unfolds,
one of the challenges will be
to determine a market price
for these assets.” it as
much as $100 billion in equity in conjunction with loans guaranteed by the
Federal Deposit Insurance Corp. to remove $500 billion in troubled assets
from banks” balance sheets.
The theory is that the extra federal backing will encourage investors to
accept the risk of bidding for assets at sufficiently high prices to induce the
banks to sell, unfreezing the market. Banks had been loath to unload
their toxic assets at deep discounts because doing so would have
acknowledged unacceptable losses.
As of press time, the finer details of how the PPIP
auctions will function had yet to crystallize. But already there
is plenty of jockeying for position as banks and investors
aim to profit.
As the major players among pension funds,
insurance companies and hedge-fund investors
commit more capital to the program and begin
to manage these assets, more will be uncovered
Anatomy of a mortgage pool about the actual contents of the toxic mortgage
During the housing boom, Wall Street mas- pools. Eventually, reliable data will emerge
queraded as a giant money factory. Instead of about the ratio of good to bad loans. A hefty
money, however, major banks and investment number of toxic mortgage assets auctioned to
houses produced financial instruments known investors at 50 cents on the dollar, for example,
as derivatives. Few people knew precisely will remain performing loanson whichthe full
what assets went into the making of securities dollar is owed, and the borrowers will qualify
backed by residential mortgages. As long as for a straightforward refinancing.
the securities were making money, few people As these loans are salvaged and removed
cared what comprised residential mortgage- from the pools, a healthy volume of revenue
backed securities. likely will come via the refinancing business.
When that changed, it became critical to Brokers can take advantage of this business,
know exactly what lurked inside the highly thusfindingtheir own trickle-downadvantages
opaque pools of securitized mortgages as they from the PPIP.
were auctioned off to investors. That knowledge
continues to be important as banks struggle to clean up their balance sheets. Extracting creditworthy borrowers
Even with that new market imperative, however, it is extremely difficult Historically low mortgage interest rates could sway refi decisions from
bor-to value the assets. So the default position is to deem the entire pool toxic. rowers in these pools. Even creditworthy borrowers with reliable incomes
This has occurred in large part because the mortgage pools grew in a some- may be uneasy about letting their option ARMs reset to include greater
what arbitrary fashion, defined more by loan type and date information than monthly payments. In some cases, now-affordable loans may otherwise
be-by creditworthiness. For example, a group of 100 loans may have nothing in come unmanageable.
common other than their issue date — July 2005, for example — and the fact Mortgage brokers can develop strategies to identify and court these
bor-that they”re option ARMs. rowers. According to a Credit Suisse estimate, option-ARM resets accelerate
In reality, none of those loan characteristics accurately indicates how in- this coming spring from about $4 billion a month in March to $14 billion a
dividual loans in the pool are performing. In fact, many solid borrowers are month in September 2011.
lumped in with subprime (aka, nonprime) borrowers simply because of the Brokers can enter this market by working with smaller banks that have
timing and terms of their loans. A highly creditworthy doctor or other profes- troubled assets on their books and boutique investment funds looking to
sional, for example, might have opted for a stated-income loan that became buy troubled pools. It”s similar to networking with real estate agents and
part of that July 2005 pool simply to avoid revealing actual income or the homebuilders: The most-important things are to cultivate relationships, study
hassle of a fully documented loan application. each of the loans and talk to borrowers to determine if they will be eligible
How many of these nontoxic loans are part of the toxic pools? We can to refinance.
guess, or we can embark on laboriously sifting through loan pools, mortgage This could help potentially souring loans evolve into stable, long-term
by mortgage, prospecting for flakes of gold. investments underwritten and funded based on accurate borrower profiles.
Some of the only evidence to date related to such efforts and produced by In turn, it allows brokers new business and a way to help clean up what has
interested investors has been anecdotal. According to these reports, it is not become an economic mess.
On the Web
U.S. Treasury Department Public-Private Investment Program
Other recent Scotsman Guide coverage of mortgage pools:
Chip Larson is president of Home Equity Partners, a California-based
firm that acquires troubled mortgage assets in California, Nevada and
Arizona. Home Equity Partners” experienced managers help clear
nonperforming assets off the books of financial institutions with troubled
mortgages. The company offers mortgage products that allow
struggling homeowners to remain in their homes and share in future
appreciation. This model represents a new financial direction for all involved.
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