Burned mortgage investors seek "high-touch" healers

A foreclosed home is seen in Stockton, California in this May 13, 2008 file photo.

NEW YORK (Reuters) - Mortgage investors, watching homeowners default on their loans in record numbers, are fighting back to limit the losses on their assets.

Dire forecasts for the slump in the U.S. housing market have spurred investors to turn up scrutiny on the management of the loans they own, which can make the difference between profit and loss.

What they are finding is companies overwhelmed by the volume of loans that need special attention due to delinquencies that show little signs of slowing.

After a year of crisis, servicers are increasing the number of "high-touch" loss mitigation staffers who can underwrite new loans for financially stretched customers and haggle with buyers of homes in foreclosure. But investors say they are still finding deficiencies due to backups of onerous work, skyrocketing costs and a lack of incentive.

"Some servicers were not even picking up the phone saying 'are you going to pay this month?'," said Sadie Gurley, a managing director at Marathon Asset Management in New York.

Disillusioned, investors are looking for help or simply taking their business elsewhere.

As a result, a breed of mortgage servicer that was out of the limelight during the housing boom is becoming more prominent. Known as "special servicers," the companies are geared toward taking bad loans and making them current, rather than the basic servicing business of collecting and distributing payments.

This year Fannie Mae, the Washington-based mortgage finance giant that owns or guarantees $3 trillion in loans, has pulled loans from some servicers and handed them to others including Litton Loan Servicing LP. Marathon went a step further last year and started its own servicer.

"Losses and thin capital that Fannie Mae and Freddie Mac are experiencing has put the pressure on servicers," said Ron Morgan, who oversaw 3,500 servicing companies at the Resolution Trust Corp., the government company set up in the late 1980s to liquidate assets of failed savings & loans.

The housing finance giants are saying "we're not going to tolerate this any more," said Morgan, who is now a managing director at ISGN, a mortgage technology provider that does business with Fannie Mae and Freddie Mac.

Companies giving way to special servicers include GMAC LLC, sources said. GMAC's Residential Capital on Tuesday revealed deeper financial stress, citing the need for up to $1.4 billion to pay debts after it was unable to sell assets.

Fitch Ratings downgraded Residential Capital's servicer rating last week. ResCap as of March serviced 3.28 million loans worth $458 billion, and 45 percent were the second-lien or non-prime loans. A GMAC spokeswoman did not return a call asking for comment.

Quantum Servicing Corp., a Shelton, Connecticut-based unit of Clayton Holdings, has picked up 25 percent more loans in 2008, and sees growth of some 75 percent by year-end, said John Anderson, a Quantum senior vice president.

Specialized Loan Servicing LLC, based in Littleton, Colorado, has seen inquiries from investors up tenfold, much of it with the blessing of other servicers who don't have the capacity, said John Beggins, SLS's chief executive officer.

Investors building new portfolios out of distressed assets are also shopping for servicers, he said.

Credit Suisse, in an April study, found performance among servicers varies dramatically. That's because servicers are faced with increased costs and the loss of incentives such as their stakes in securitized mortgage assets whose values have eroded, analyst Rod Dubitsky said in the research note.

For example, on the cost front, loss mitigation specialists may charge upward of $60,000 a year versus $25,000-$30,000 for a person who only makes initial contact with borrowers inside a 30-day late period, said Rick Smith, chief executive officer of Marathon-financed Marix Servicing LLC in Phoenix, Arizona.

The cost of advancing payments on delinquent loans to investors is taking an even bigger bite out of profit.

Fannie Mae has reassigned loans, but the practice isn't common to its huge portfolio, said Jason Allnutt, who as vice president for credit loss management at Fannie Mae handles the company's 1,400 servicers. Freddie Mac hasn't moved loans, though it has taken steps to enhance its servicers' loss mitigation efforts, said Robert Padgett, a director at Freddie Mac's McLean, Virginia, headquarters.

Most servicers have taken notice of investor demands and are now meeting expectations, Allnutt said. Last summer's surge in delinquencies as lenders tightened standards and home prices sent servicers scrambling to catch up, he said.

"It took about three to four months for most of the servicing industry to get up to pace to meet that demand," he said. "I don't know of any (servicer) in June or July (2007) that was ready to deal with that surge," he said.

Houston, Texas-based Litton, one of the largest servicers of risky loans during the subprime heydey, has taken on loans from Fannie Mae, a spokeswoman said. Backing from Goldman Sachs Group Inc, which bought Litton in December, should bolster the company's ability to manage its $46 billion portfolio, Moody's Investors Service said.