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Guess who holds your mortgage now? It's your friendly neighborhood hedge fund. Dozens of hedge funds, private equity groups and other investors have plunged into the beaten-down mortgage market in recent months, buying tens of thousands of distressed loans and foreclosed properties around the country. They are buying them from Wall Street investment banks eager to rid themselves of bad assets. Merrill Lynch & Co., for example, said this week it would sell mortgage-linked investments once valued at $30.6 billion for just $6.7 billion to Lone Star Funds, a distressed-debt investor in Dallas. Many of the hedge funds, run by former Wall Street and lending industry executives, claim they can do a better job than banks or other investors to modify mortgages at terms consumers can afford. "We're much easier to deal with than a bank," said Jacob Benaroya, managing partner of New Jersey-based Biltmore Capital Group, a hedge fund that's buying up to $100 million in mortgage debt per year. "We've bought (the loan) at enough of a discount that we can make special arrangements with the borrower." However, the hedge funds acknowledge the loans they purchase are often in such trouble that as many as two-thirds to one-half can't be salvaged. In that case, the fund obtains the property through foreclosure and tries to sell it off, or allows the borrower to turn over the house keys in return for forgiving the outstanding mortgage balance. Hope for consumers Housing advocates say they haven't yet seen the impact of such hedge funds among the borrowers they counsel. But they hope these new investors will be more amenable to borrowers interests' than the current mortgage holders, which have been widely criticized for being sluggish to modify loans amid an unprecedented volume of defaulting loans. Still, there are some worries that desperate borrowers unwittingly may be giving up protections - such as the right to sue the original lender - when they agree to a modification. "Borrowers are not represented by an attorney or anybody who can advise them about the legal effects of what they're signing," said Kurt Eggert, a professor at Chapman University's law school. Distressed debt investors, however, emphasize they are less bureaucratic and more willing to make changes than most loan services, which collect and distribute mortgage payments. Restructuring the loan, when possible, is often faster and less expensive than going through the foreclosure process. "We're fully aligned with the interest of the borrower to find a way to make the loan more valuable by keeping them in their home," said Stanford Kurland, a former Countrywide Financial Corp. executive who founded Private National Mortgage Acceptance Co. Kurland's company, nicknamed PennyMac, aims to raise $2 billion for mortgage acquisitions.
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