“Underwater” Homeowners Beware! The Ocean of Foreclosure Is Crawling with a New Breed of Sharks

If you thought that banks and the federal government were going to give up, think again.

Let’s say you are a distressed homeowner. Let’s say you have a hefty mortgage. Let’s also say that you are working with your bank on a loan modification. The chances are that one fine day you might receive a letter from a new owner of your mortgage and servicer.  The letter will inform you that your mortgage was sold by your lender to a private equity firm and that a lawsuit is forthcoming, seeking to foreclose on your home. Right when the housing market was finally recovering, thousands of homeowners are now confronted with this new unfortunate chapter engineered by banks and by the federal government to deal with “underwater”  mortgages: troubled loans are sold for a discount price at federal auctions to private equity firms, entities that are far more “creative” than banks in recovering from delinquent borrowers. Hence, the new breed of sharks.

Here We Go Again, Wall Street Is Repackaging Home Loans of Unwitting Owners Like You and Me and Selling Them to Hedge Funds.

Beware! These transactions bring substantial benefits to both sides.

On one hand, private equity firms buy these loans at a discount of as much as 30 percent. As a consequence, the firms’ profit margin on successful foreclosures is temptingly high. In addition to that, private equity firms have the option of extorting even more profits by repackaging distressed loans into bonds that are sold to hedge funds and mutual funds on Wall Street.  

How the Federal Government Is Using Private Equity Funds to Foreclose

On the other hand, the federal government gets rid of idle mortgages and immediately recovers substantial sums of money. Moreover, the government can shield itself from negative publicity by delegating the dirty work to private entities.

According to the New York Times, the most criticized of these private equity firms is Lone Star Funds, founded in 1995 by John Grayken. In the summer of 2014, Lone Star bought a bundle of 17,000 distressed mortgages at an auction held by the Department of Housing and Urban Development. Such mortgages had an unpaid balance of almost $3 Billion and were originally issued by a variety of different banks with insurance guarantees from the Federal Housing Administration. By the end of August, Lone Star had foreclosed on at least 9% of the loans according to RealtyTrac, and many of these foreclosures involved houses in Florida.

Ironically, the government is washing its hands of this mess and allowing these new lenders to foreclose quickly and resell the homes — the easiest path to making huge profits to the detriment of distressed homeowners.

Although these firms’ aggressive practices may seem scary, many homeowners were nevertheless able to stop the foreclosure process by pursuing any and all options available and by going to court when necessary. As always, the best advice is to stay strong and defend your home.

From the Trenches,

Roy Oppenheim