Every mortgage banker knows it takes a license to lend in any state, but what if your firm only services loans?
And what if you happen to manage one of the dozens of vulture funds popping up to buy delinquent and subperforming mortgages? If you purchase a loan and then modify it, does that count as an origination, and thus require a license?
Loan modification firms and investors in nonperforming loans are grappling with these questions. Roughly 20 states require firms to carry a license of some sort if they're engaged in the practice of collecting (or trying to collect) monthly mortgage payments.
"It all depends on where your loans are," said George Ostendorf, a former executive at Hanover Capital Mortgage Holdings Inc. who now plies his skills in the nonperforming loan market. "It's a real gray area. Some firms might be exempt if they have a relationship with a servicer. And some states are ambiguous."
For the vulture funds, Ostendorf said, the issue is, "If you attempt to restructure a loan it can be argued" by the states "that it's an origination, a new loan," which would require the investor to have an origination license.
Last month Kondaur Capital, an Irvine, Calif., firm that invests in nonperforming loans, received a cease-and-desist order from the Georgia Department of Banking and Finance for engaging in what the state called "mortgage broker/lending activities." Kondaur was not funding loans in Georgia, but it had purchased some nonperforming loans there.
Jon Daurio, Kondaur's chief executive officer, said it is licensed to service in "all states except Georgia," where it did not have an origination license either. Hence the order. But Daurio said he has learned his lesson: Kondaur is in the process of getting licenses to lend in all 50 states.
PennyMac Mortgage Investment Trust, a vehicle run by the Calabasas, Calif., vulture investor Private National Mortgage Acceptance Co. LLC, acknowledged the licensing issue in its recent filing for an initial public offering. The filing warns prospective investors in the trust that a failure to obtain the necessary "licenses promptly or our failure to satisfy the various requirements or to maintain them over time will restrict our direct business activities."
One way to get around the licensing problem is to use a subservicer, but not all nonperforming loan investors want to do that, especially in a business where they are seeking high returns by purchasing notes on the cheap, cleaning them up (either through modification or foreclosure) and then selling them.
The key to licensing is passing background checks and then obtaining bonding from an insurer. Therein lies the problem. Before the financial meltdown, a $100,000 bond could be easily obtained by a company making a 10% down payment and carrying a note for the balance. But several bond insurers including American International Group Inc. have stopped writing coverage or greatly reduced their business.
"That means I have to put up the full $100,000," Daurio said.
Thanks to seed money provided by to Kondaur by the hedge fund Pequot Capital, Kondaur can afford this barrier to entry. That may not be true for smaller players.