Servicers Have Full Plate in Dealing with Seconds

For any mortgage servicer, getting ahold of delinquent borrowers can be tough, but those handling troubled second mortgages have an additional problem: getting the banks that hold the senior liens to cooperate.

Consider Dreambuilder Investments LLC. Founded five years ago, the New York outfit buys junior liens from lenders at a discount and works with borrowers to bring the loans back to performing status before reselling them for a profit (or, in the worst instances, liquidating the loans).

To get defaults cured, it needs the cooperation of senior lien holders, because they are first in line to be repaid whether the first mortgage is foreclosed or worked out. But for the same reason, the senior mortgage holder typically has little incentive to work with the company.

It is such an acute problem that about a quarter of Dreambuilder’s 16 employees spend their days exclusively speaking with banks about creating workouts to provide repayment on both liens.

However, with pressure mounting on banks to keep troubled borrowers in their homes and servicing departments overwhelmed and understaffed, Dreambuilder says it has found senior lien holders more receptive lately to its goal of providing a workout on both loans.

They “would rather have a performing asset than a nonperforming asset,” said Peter J. Andrews, Dreambuilder’s president and chief executive. “That is the only incentive” to cooperate with his company.

Dreambuilder tries to act as an “intelligent resource on behalf of the borrower” in dealing with the senior lien holder, he said.

Ted Korzenski, the senior vice president of special servicing at the Quantum Servicing Corp. unit of Clayton Holdings Inc. in Shelton, Conn., said that second-lien servicers have the most “negotiating room” with senior-lien-holding banks when “the borrower is truly upside down and beyond the first lien” and headed to foreclosure unless a servicer offers some kind of workout.

Mr. Andrews said the key to creating a workout that accommodates both liens often lies in speaking with the appropriate party at the bank holding the senior lien.

“Many times, what winds up happening is the person handling loss mitigation is restricted in what they can do” to help a borrower, he said. “We have to talk to the business folks instead of the operations folks. It takes a lot of effort and energy to get to the person that has the authority and the high-enough view that can really make the appropriate business decision.”

About 10% of the time, when a workout proves too complicated or banks are unwilling to cooperate, Dreambuilder buys the senior liens at a discount from the banks. The first and second are then packaged together, repaired, and sold to other investors, Mr. Andrews said.

About a quarter of the time, Dreambuilder will accept a deed in lieu of foreclosure and give the borrower some cash “so they can get a fresh start,” he said.

The company tries to control costs by outsourcing all its call center work to vendors, including the default servicing divisions of lender services companies like First American Corp. of Santa Ana, Calif., and Fidelity National Information Services Inc. of Jacksonville, Fla.

Mr. Andrews said Dreambuilder is talking with the Hope Now alliance of servicers, credit counselors, and trade groups about getting senior lien holders more involved in rescuing high-risk properties from foreclosure.

Dreambuilder also is finalizing an arrangement with a government agency to facilitate relationships with banks, Mr. Andrews said (he would not identify the agency).

Last year Dreambuilder bought and sold 800 mortgages. Mr. Andrews said he expects it to work on 2,000 loans this year.

Mr. Andrews cut his teeth running the Goldman Sachs account for the technology vendor Akibia Inc., and said he saw the market for seconds as an unexplored niche that was potentially more lucrative than the senior lien business because of the additional risk.

Though Dreambuilder is funded by several wealthy individuals, Mr. Andrews said it is considering a $50 million line of funding offered by a hedge fund.

Dreambuilder is not the only company taking an increasing interest in junior lien servicing as foreclosures spike.

Special Recovery Group Inc., a Richardson, Tex., collections agency and special servicer for mortgages, says that in January its servicing portfolio grew 30%, and “all of that is seconds,” according to its CEO, Dave Vida.

Overall, about 55% of the firm’s servicing business involves seconds, Mr. Vida said.

Like many other servicers, he said it has not been easy for his business to get in touch with borrowers who fear that working with servicers will only speed the foreclosure process.

Communicating with those borrowers is critical to reaching the senior lien holders, Mr. Vida said, because sometimes “we don’t even know what state” houses those institutions.

Mr. Korzenski said about 25% of the 5,200 loans currently boarded by Quantum are second-lien mortgages. Quantum plans to take on another 3,700 second liens in the coming weeks, he said.

To view the online article, please click here

About Safeguard
Safeguard Properties is the largest privately held field services company in the country. Located in Cleveland, OH  and founded in 1990 by Robert Klein, Safeguard has grown from a regional preservation company with a few employees and a handful of contractors performing services in the Midwest, to a national company with over 450 employees.  Safeguard is supported by a nationwide network of subcontractors able to perform any requested superintendence, preservation, and maintenance functions, as well as numerous ancillary services in the U.S., the Virgin Islands, and Puerto Rico.