Why are Mortgage Companies Making the same Mistakes Banks Made?

If you believe that companies should learn from the mistakes made by those that came before them, you might be surprised to learn that private equity firms are making many of the same mistakes big banks made that nearly sent us into complete economic failure in 2008. These equity firms face less oversight than the banks and appear to be focused on the bottom line rather than on keeping homeowners in their homes.

When the housing crisis sent the American economy to the brink of disaster in 2008, millions of people lost their homes. The banking system had failed homeowners and their families. Since then, new investors have swept in — mainly private equity firms — promising to do better.

But some of these new investors are repeating the mistakes that banks committed throughout the housing crisis, as a recent investigation by The New York Times has found. They are quickly foreclosing on homeowners. They are losing families’ mortgage paperwork, much as the banks did. And many of these practices were enabled by the federal government, which sold tens of thousands of discounted mortgages to private equity investors, while making few demands on how they treated struggling homeowners.

The rising importance of private equity in the housing market is one of the most consequential transformations of the post-crisis American financial landscape. A home, after all, is the single largest investment most families will ever make.

Out of the more than a dozen private equity firms operating in the housing industry, The Times examined three of the largest to assess their impact on homeowners and renters.

Lone Star Funds’ mortgage operation has aggressively pushed thousands of homeowners toward foreclosure, according to housing data, interviews with borrowers and records obtained through a Freedom of Information request. Lone Star ranks among the country’s biggest buyers of delinquent mortgages from the government and banks.

Nationstar Mortgage, which leaped over big banks to become the fourth-largest collector of mortgage bills, repeatedly lost loan files and failed to detect errors in other documents. These mistakes, according to confidential regulatory records from a 2014 examination, put “borrowers at significant risk of servicing and foreclosure abuses.

Unlike the banks, Nationstar wears many hats at once: mortgage bill collector, auction house for foreclosed homes and lender to new borrowers. By working every angle, and collecting fees at each step, the company faces potential conflicts of interest that enable it to make money on what is otherwise a costly foreclosure process.

In the rental market, The Times found, other big private equity firms largely bypassed the nation’s poorest neighborhoods as they scooped up and renovated foreclosed homes across the country. Those firms include Blackstone, a huge private equity firm and the nation’s largest private landlord of rental houses.

These decisions point to shortcomings of the government’s response to the housing crisis. Rather than enact sweeping changes to housing policy, the government largely handed the problems to a new set of companies.

Private equity plowed into the housing market after big banks and regional lenders, facing a crackdown from federal regulators for wrongful foreclosure practices, pulled back in the aftermath of the crisis. The shift led private equity firms to spend tens of billions of dollars acquiring homes and troubled mortgages from banks and the government.

For private equity firms, which specialize in buying companies at a bargain, the housing market was just their latest investment in a distressed asset. These firms, unlike banks, raise money for their deals from pension funds and other huge institutional investors.

The wave of private equity investment in housing has had a positive impact on the American economy.

The firms displaced poorly performing banks. They also helped stabilize the nation’s housing market, and it achieved that through smart business decisions about where to put its money. That, in turn, rewarded investors — which is how private enterprise is supposed to work.

But much of this investment has not benefited poor neighborhoods. Banks are expected, under the Community Reinvestment Act, to help meet the credit needs of low-income neighborhoods in areas they serve. Private equity has no such obligation.

The idea is that banks should follow an implicit social contract: In return for government loans and other support, they are expected to serve a community’s needs. Private equity, which unlike the banks does not borrow money from the government, is answerable to its investors. Those investors include some of the nation’s largest pension plans, whose members — teachers and police officers among them — may support improvements to such lower-income areas.

Government officials are also concerned that private equity’s mortgage firms face less scrutiny than banks. While banks are examined by regulators for financial soundness, no similar testing occurs for private equity’s companies.

Ginnie Mae, which issues securities backed by mortgages with government guarantees, wants Congress to grant it greater oversight over nonbank mortgage firms and provide money to perform “stress tests.” The fear is that one firm’s failure would create hardship for millions of customers.

“It’s an Achilles’ heel for us to some degree,” said Ted Tozer, Ginnie Mae’s president.

Do you think the government should impose greater oversight over these private equity firms in managing mortgages? We’d love to hear from you!

Read the full article here.