Analysis: Boomtime mortgage execs gear up for U.S. market shift

NEW YORK (Reuters) - Some big names behind the riskiest arena for mortgage lending during the boom are staking out new territory in the $11 trillion market as U.S. lawmakers draft plans to sharply reduce government housing support.

Executives such as Saul Sanders, a founder of niche subprime bond issuer C-BASS, and Larry Goldstone, former chief of Thornburg Mortgage, are among those who have formed new companies with an eye to boost the flow of private mortgage funds to the market.

The veterans of the two bankrupt companies are joining investment banks and money managers seeking a toehold in the mortgage market as Congress prepares the biggest overhaul of housing finance since the Great Depression.

“Despite the taint associated with those that have been working in the industry, they are also the most knowledgeable and experienced,” said Clifford Rossi, a teaching fellow at the University of Maryland business school and former chief risk officer for consumer lending at Citigroup.

“They understand the complexities of this market and have the best chance of succeeding in bringing back a more private market than what we’ve had over the past few years.”

While the path of reform is anyone’s guess, lawmakers and regulators agree that the hammerlock that Fannie Mae, Freddie Mac and the Federal Housing Administration have on the market must be busted. They cite the huge cost to taxpayers, as well as the opportunities and efficiencies of a private market.

There are growing signs that private capital is lining up, at least in the "jumbo" loan market, said Greg Garrabrants, chief executive of San Diego online lender Bank of Internet BOFI.O. He told analysts in a recent call that investor demand for loans was strong, as illustrated by the "nice premiums" offered.

Garrabrants described his jumbo loan business as “going gangbusters” and later told Reuters that former Thornburg employees he hired have given the bank a “huge head start.”

Openings for private companies are expected to widen later this year as Congress reduces the size of loans eligible for Fannie Mae and Freddie Mac fundings.

“You can wait for the government to get everything lined up, or you can prepare for the race in advance and be ready to charge out of the chute,” said Dan Nigro, a Montclair, New Jersey-based bond consultant and former portfolio manager.

Securitization was a crucial source of funds behind the glut of credit during the boom and its absence is hurting housing’s recovery.

With banks bearing the brunt of regulatory scrutiny, new mortgage market entrants are likely to be non-banks, said Scott Buchta, a strategist at Braver Stern Securities in Chicago. As these firms emerge, competition may help lower rates, he said.

Non-banks may also ease tight lending standards within the parameters set by regulators, analysts say. In addition, it’s likely that regulations on banks will be more onerous.

Through his venture capital firm Aventur Partners, Goldstone’s Aventur Mortgage Capital is raising “initial capital” to develop a jumbo lending platform, according to the firm’s website. It will also seek securitization, his LinkedIn profile says.

Goldstone did not return a call.

Thornburg Mortgage, one of the largest providers of “super jumbo” loans above $750,000, filed for bankruptcy in 2009 with $36.5 billion in assets.

Following the bankruptcy of Credit-Based Asset Servicing and Securitization, C-BASS founder Sanders and partner Bruce Williams started Shellpoint, according to National Mortgage News and LinkedIn. Former C-BASS executives Robert Magee and Mac deTuro also work for Shellpoint, according to LinkedIn.

Magee, listed as chief investment officer, declined to comment. Other Shellpoint officers could not be reached.

Sanders founded Goldman Sachs Group’s asset-backed securities department, according to his C-BASS biography. Between 2000 and 2006, C-BASS earnings rose by more than 40 percent a year, according to a Blackstone Group study done after it helped C-BASS manage crippling margin calls in 2007.

The C-BASS team is in talks to buy Pennsylvania lender New Penn Financial, National Mortgage News reported this month.

Limited supply and the high cost of loans has kept players in planning stages, said Richard King, chief executive officer of Atlanta-based Invesco Mortgage Capital IVR.N, which is exploring a mortgage conduit. One day it will be "a great business," but it's not profitable yet, he said.

Other firms have made a bigger splash with their plans. A fund of BlackRock Inc BLK.N, the world's largest money manager, in November began an effort to fund and securitize jumbo loans. PennyMac Mortgage Investment Trust PMT.N, founded by former Countrywide Financial president Stanford Kurland, recently said it would fund its first jumbo loan.

Editing by Dan Grebler