With the rising foreclosure numbers being a major issue in the market right now, Paladin Strategic Partners is responding to the problem by providing socially responsible solutions.
Former MBIA managing director Carl Webb founded Paladin. Webb, together with the firm's chief risk officer Mark Zucker, former global head of structured finance at MBIA, is working to keep families in their homes while providing Paladin's investors with target returns.
Paladin is raising a $250 to $350 million fund called the Home Saver Fund. It targets one to four family residential distressed mortgages. Webb said that they might start an additional two to three funds to seize the opportunities that are out there, and, depending on how these play out, they might add staff to boost the 12-member team they currently have.
"Our firm has created a fund to help out borrowers who are at risk while providing investors with attractive returns," Webb explained.
Zucker, whose primary role in the firm can be divided into asset selection as well as portfolio surveillance and maintenance, said that when he was deciding on whether to join Paladin he had a few select alternatives but there was one example that convinced him to be part of Paladin.
The story was about a family in California who had been living in their home for around 20 years. The father became ill and the family became 120 days delinquent on their mortgage payments as a result. Even though the homeowner's health improved which allowed him to find another job, his new compensation was not nearly high enough to pay his existing mortgage. Home Saver, Zucker said, acquired the mortgage, reducing his principal and interest payments to a point where the family gained real equity in the home and enabling the homeowner to make his mortgage payments. The loan became rehabilitated and sold to the Federal Housing Administration (FHA).
"One family was saved from foreclosure," Zucker said. "This goes to the heart of what we've been trying to do at Paladin. There's a real difference between us and vulture funds. There's socially responsible and there's just wanting to maximize returns where the quick exit is through foreclosure. Our primary focus is to keep families in their homes."
"If you look at our goal of trying to prevent foreclosures where they are escalating," Webb said, "the root of the problem is not the process, it's not going to go away by merely re-filing affidavits."
Webb said the key is to find borrowers who want to stay in their homes and to modify their loans through principal reduction, interest rate reduction and debt reduction.
"It's pretty simple - being socially responsible means working out a mortgage so that you can keep borrowers in their houses," he said. "We are basically trying to understand borrowers' behavior by using a customized approach and looking at loans on a loan-level basis."
He explained that the goal is to redefine the homeowner's payment terms. One of the options is to reduce the principal, which would lower the borrower's monthly payment and make the loan affordable. Our goal is to get the borrower re-performing in six to 12 months.
From Paladin's experience, Webb said that principal reduction remains the most effective form of loan modification. "For a lot of the borrowers who have missed five monthly payments, reducing their monthly payments and forgiving principal has been the only way to get them back on track," Webb said.
Paladin helps the borrower refinance, usually into an FHA loan. "A lot of mortgages are underwater," Webb said. "With the reduction in principal at least borrowers get back at par and, in some cases, recover some of their equity."
The firm wants to distinguish itself from vulture funds that are merely looking for very cheap product. "Although we are also looking to purchase distressed mortgages at a deep discount, we are there to provide principal reduction and are not there to foreclose on a borrower. We would like to see the mortgages re-performing again," he said.
The key is performing due diligence, Webb said. "We are going through the loan file and re-underwriting the loan," Webb said. "We are working with the servicer that collects the payments to determine what situation the borrower is in to affect mortgage payments. Is it a medical issue? Is the borrower underemployed? What are his or her ties to the community?" Paladin is currently working with Quantum Servicing Corp., which specializes in distressed mortgage servicing.
Zucker added that asset selection is the key. The company's goal is that the number of foreclosures in any given pool should be no higher than single digits.
"We have around five to six criteria in selecting the loans for our pools," Zucker said. These are that the loans have to be the following: owner-occupied homes that are around 60 to 120 days delinquent; first liens; one-to-four family homes; borrowers who have been in their homes for at least five to six years; borrowers and co-borrowers who have a relatively healthy financial history; and homeowners who have a track record of positive employment.
In cases where the loans in the pools do not fit these criteria, Paladin usually culls these mortgages out from the portfolio by selling them to the market.
"Surveillance is critical," Zucker said. Although Paladin does not interact with the borrower directly, they make sure that the servicer proactively contacts the homeowners to tell them that their loan has been sold.
Paladin wants to make certain that "the monitoring criteria are proactive so that the resulting modified mortgage can be supported. The servicing is going to be much more aggressive than usual, which is a little bit more expensive for us," Zucker added.
Webb said that his more than 25 years at Fannie Mae, Freddie Mac, and MBIA have given him the market contacts and resources to perform well in this business, including managing risk and helping to determine the correct price for loans in their fund. His long standing background in the mortgage market, he said, has helped a lot since he saw the market in crisis, including the savings and loan crisis of the '80s and the more recent 1998- 2000 mortgage liquidity crisis.
Paladin is focusing on the problem - foreclosures. This issue has plagued the mortgage and housing markets since the beginning of crisis and has escalated even more so recently.
Webb said that the foreclosure crisis is going to take awhile to play out. "I would compare the problem with foreclosures to a pig that has to go through a snake, and it's going to take probably three to five more years."
However, he said that the socially responsible players like them have a very important role. "We are not a big-sized fund, but there's a lot of opportunity to expand this kind of platform. There's no easy way out of this crisis and it's going to continue for awhile," he said.
Webb and Zucker, who have made frequent trips to the Capitol, are following developments in Washington very closely.
"It's turning more and more political, so the outcome and results are less clear than they would be without the politicians becoming involved," Zucker added.
As it is now, he said, each state is getting involved and is looking into this matter."This is going to continue for a bit, and it is going to get messy," he said. "We are entering the political realm and for how long and how this will be resolved is not clear at this point."
From Paladin's standpoint, Zucker said that, "this is good for us and the reason is that it gives us the opportunities where we can keep people in their homes who were tossed arbitrarily because their principal has not been reduced."
Zucker said that if one takes a look at some of the programs that the Obama administration has tried to implement, principal reduction has not played a material part. "You must lower the payment to bring the mortgage to an affordable level and you also have to supply real equity in borrowers' homes. If there is no value in that investment, why keep it?"
The administration has been "very passive with what they want to do. I think the Barney Frank bill slated for early next year regarding the GSEs and some other topics will somewhat solve the lack of firm direction from the administration," Zucker said. However, he reiterated that there has to be a concerted effort among the different government agencies to solve the foreclosure crisis.