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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 hope to profit from the woes of banks and other investors holding mortgages that have plummeted in value as house values sink and defaults soar. They are buying them from Wall Street investment banks eager to rid themselves of bad assets. Merrill Lynch & Co., for example, said this week that 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 of modifying mortgages at terms that consumers can afford. However, the hedge funds acknowledge that 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, or allows the borrower turn over the keys in return for forgiving the outstanding mortgage balance. So far, housing advocates say they haven't seen the impact of 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 defaults. "I have been waiting for this to happen," said Gabe del Rio, vice president of lending at Community HousingWorks, a nonprofit housing agency in San Diego. "It will equate to a deeper ability to modify mortgages." 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 that they are less bureaucratic and more willing to make changes than most loan servicers, which collect and distribute mortgage payments. "They've got too many loans and not enough people," said Matt Stadler, a principal with investment group National Asset Direct, which currently owns about 750 loans and is looking to double that amount. 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. To negotiate new loan terms with borrowers, some companies are setting up their own loan servicing operations. For example, Marathon Asset Management, a New York-based hedge fund that specializes in debt investments, has its own loan servicer, Phoenix-based Marix Servicing, to handle the loans it purchases and those for other companies. The company's 85 employees handle no more than 200 cases each, compared with 500 or more for more typical loan servicing companies, said Rick Smith, the company's president. His employees are also more aggressive. "It's not just calling somebody once a week," Smith said. "We might call them on a daily basis, morning noon and night to find the best contact."
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