The Dallas Morning News - 8 SEP 2016
Mortgages to borrowers with spotty credit histories have yet to come roaring back from the financial crisis, but they are on the rise at Dallas-based private equity giant Lone Star Funds.
Its wholly owned mortgage business, Irving-based Caliber Home Loans, is one of the few financial firms to report a significant percentage increase this year in the dollar value of subprime mortgages it is managing and servicing for homeowners.
Most of the subprime mortgages at Caliber are "legacy" loans, those issued before the housing bust, which Lone Star acquired from banks and federal agencies.
But Caliber is also one of the few lenders beginning to issue mortgages to borrowers with less than perfect credit records and to issue bonds backed by those loans.
The market for such loans and bonds has remained largely dormant since the financial crisis. The recent activity from Lone Star and Caliber may be the clearest sign of a nascent revival in a corner of the mortgage market that most big U.S. banks have not dared to touch.
For the second time in three months, Lone Star, which was founded by the billionaire investor John Grayken in 1995, has indicated that it is on the verge of bringing to market a mortgage securitization backed mainly by newly issued mortgages to borrowers with troubled credit histories. Many of the nonprime mortgages bundled into the bond offerings were written by Caliber in the last two years.
Lone Star and Caliber sold a similar but smaller bond offering last year.
These loans differ in many regards from the worst of the subprime mortgages made before the housing bust. The borrowers taking out these mortgages, known as Fresh Start loans, from Caliber must prove their ability to repay loans, and, while some have had bankruptcies or foreclosures in the recent past, they are seen as likely to keep up with their monthly payments.
Lone Star and Caliber are moving into these so-called nonprime mortgages as big banks in the United States continue to leave the business of managing mortgages to borrowers with spotty credit histories in the wake of the foreclosure crisis.
Big banks are focusing much of their effort on what are known as jumbo mortgages, home loans issued to wealthier borrowers with pristine credit histories who are borrowing more than $400,000. Jumbo mortgages are more profitable and less risky for banks than smaller loans to homeowners.
Caliber, a firm that Lone Star began cobbling together nearly four years ago, is now one of the fastest-growing mortgage finance firms in the country. Caliber is the 10th largest mortgage servicer, or bill collector, out of 30 major firms nationwide.
Its portfolio of subprime mortgages increased about 14 percent, to $17 billion, in the last year, according to Fitch Ratings. Mortgages to borrowers with shaky credit histories account for 18 percent of the $93 billion in mortgages that Caliber manages and collects payments on from homeowners.
Overall, the percentage of subprime mortgages managed by financial firms has declined by an average 16.7 percent in the last year, according to Inside Nonconforming Markets, a trade publication.
In a statement, Caliber said the focus on the increase in the number of subprime mortgages in its portfolio overlooks that the vast majority of mortgages it manages and underwrites are to borrowers with solid credit histories.
"The growth of Caliber's servicing book should not be characterized by a single data point, as over time it will be driven by Caliber's origination activity -- which does not include any subprime products," Caliber said by email.
The firm added that its Fresh Start loan program, "a new nonconforming product that Caliber offers to underserved borrowers, makes up less than 1 percent of all annual production and is not considered subprime."
Subprime investing is not new to Grayken's firm. In 2014, Lone Star bought DFC Global, a payday lender that makes high-interest, short-term loans to consumers.
The growth in Caliber's subprime business in part reflects the fact that Lone Star has emerged as one of the largest buyers of distressed mortgages. One of Lone Star's biggest purchases of soured mortgages was a pool of 17,000 loans it purchased at a steep discount from the Department of Housing and Urban Development.
That deal has prompted criticism. Housing advocates contend that Lone Star and Caliber have been too quick to foreclose on borrowers and have been unwilling to negotiate over the terms of a loan modification.
Caliber has foreclosed on roughly 21 percent of the mortgages brought from HUD, up from 14 percent at the end of last year, according to an analysis by RealtyTrac of the firm's loan data that was reviewed by The New York Times.
Caliber has defended its handling of the HUD loans, noting that most borrowers were more than two years delinquent on their mortgages.
"The vast majority of the loans in the HUD pools came to Caliber in some stage of foreclosure, including some 8,300 loans associated with abandoned properties or borrowers whose loans we are legally prohibited from contacting to offer a modification opportunity," the company said.
More recently, Lone Star has been buying thousands of distressed loans from auctions staged by Fannie Mae and Freddie Mac.
A Caliber representative said the criticism of the firm was misplaced and pointed to a recent survey by J.D. Power that ranked the firm eighth on consumer satisfaction, well ahead of much larger firms like Nationstar Mortgage, Bank of America and Wells Fargo.
The rapid growth at Caliber, which has more than 5,000 employees, has not been without problems.
The firm's mortgage modification and foreclosure practices have prompted investigations by regulators in New York. Last year Fitch issued a negative outlook on Caliber, in part because of its rapid growth and heightened regulatory scrutiny.
Roelof Slump, a managing director at Fitch, said the ratings agency had no immediate plans to revise its outlook on Caliber, but had noted that the firm acted this year to "enhance their staffing." He cited the appointment of Sanjiv Das, the former chief executive of Citigroup's mortgage division, as Caliber's chief executive.
In June, Fitch reviewed and rated the first securitization of nonprime mortgages Lone Star brought to market, a $161 million bond offering backed by nearly 400 mortgages, which is one of the largest securitization of nonprime mortgages since the financial crisis.
In its review, Fitch noted that the "credit quality of the borrowers is weaker than prime."
Now, Lone Star plans an even larger bond offering backed mainly by nonprime mortgages written by Caliber. In a Sept. 6 pre-sale ratings report, Fitch said the newest $217 million securitization will be backed by 501 mortgages.
--Matthew Goldstein, New York Times