The New York Times recently reported about an encouraging trend where the interests of Wall Street and borrowers intersect. Hedge funds have been purchasing mortgages from banks and persuading homeowners to refinance the mortgages to reduce the principal owed.
Investors are able to reduce the principal on loans because they purchase the mortgages from banks at a steep discount. Banks that are suffering with liquidity problems may prefer the upfront cash offered by a hedge fund rather than waiting and hoping that they receive a superior return in the long run.
Thus, a fund might purchase a $100 million portfolio of mortgages from a lender for less than half the face value. The fund can then contact the borrowers and try to refinance the mortgages. Once refinanced, the fund can sell the mortgage to a company who will ultimately collect the mortgage payments. As long as the fund refinances the mortgages and sells them for more than it spent, the fund will make a profit.
This practice appears rife with risks, especially the risks that hedge funds are stuck with mortgages that go into foreclosure or that hedge funds cannot find a buyer for the refinanced mortgages. But, once refinanced, the Federal Housing Administration will insure the refinanced loans against loss. Then, the hedge fund can sell the government-insured loan to other federal agencies, such as Ginnie Mae. The taxpayers bare the risk.
To the homeowner, though, the arrangement seems too good to be true. In the example provided in the New York Times article, a couple had its $440,000 mortgage reduced to $314,000, a reduction of almost 30 percent. The hedge fund that owns the mortgage does not interact directly with borrowers. Instead, it hires intermediaries to make the arrangements.
The hedge fund is solely motivated to refinance the mortgage and may aggressively push the refinance. However, a refinance is not always in the borrower's best interests. A homeowner should be careful in considering the offer. Contact an attorney experienced in working with lenders and ensuring that a loan modification works to your benefit.
