News

American Banker - May 16, 2008
by Kate Berry  

Of the numerous strategies that have been proposed for stemming the foreclosure tide, many involving Federal Housing Administration refinancings, few if any start with the investors holding troubled mortgages.

That is where National Bank Of Kansas City has been looking for opportunities to boost FHA volume. Since January the $963 million-asset Overland Park, Kan., unit of Ameri-National Corp. has been approaching noteholders with a proposition: Identify loans in your portfolio that you would like to unload, and the bank will solicit the borrowers to refinance.

The loans it targets are current but typically are adjustable-rate mortgages whose teaser rate is soon to reset. "These loans might have a high possibility of default or foreclosure, and the noteholder would rather get them refinanced," said Todd Geiman, an executive vice president at the bank's mortgage division.

With the secondary market for such loans moribund, helping borrowers refinance is one of the few ways investors can cash out. And for National Bank Of Kansas City, which has seven branches in three states but lends nationally using leads purchased from IAC/InterActiveCorp's LendingTree LLC, the program is another way to generate government and conforming loan volume.

"There are a lot of holders of mortgage notes that would like to get them off their books," Mr. Geiman said. "Most of the people we're partnering with cannot fund mortgages on their own, so they're looking for a partner."

Since January, National Bank Of Kansas City has refinanced 2,000 to 2,500 borrowers through its Mortgage Recovery Program; 60% were put into new FHA loans, and the rest were put into Fannie Mae or Freddie Mac loans. The bank makes its money by selling the new loans into the secondary market, which is much more welcoming of mortgages that carry a guarantee from a federal agency or a government-sponsored enterprise.

Mortgage analysts have said the foreclosure prevention bill the House passed this month from Financial Services Committee Chairman Barney Frank, D-Mass., would rely too heavily on servicers, who have little authority to change loan terms, rather than noteholders or trustees. The bill is designed to prevent foreclosures by having servicers reduce the balance voluntarily on troubled mortgages and then refinance into FHA-guaranteed loans.

Mr. Geiman said the noteholders in National Bank Of Kansas City's program sometimes forgive a portion of the debt or waive prepayment penalties.

Still, some borrowers get turned away. With underwriting standards tightening in the secondary market, National Bank Of Kansas City's mortgage unit is turning down a higher percentage of borrowers "than we would have hoped," primarily because of poor credit or low property values, said Christa Spencer, a bank spokeswoman. (The bank would not give a specific number.)

Bill Alread, a managing partner of contract finance at Steel Mountain Capital Management LLC, a Lakewood, Colo., investor in scratch-and-dent mortgages, said it has had "quite a bit of success" using the program. "This is one of the few options to show liquidity out of our portfolio."

One pitfall has been trying to communicate effectively with borrowers, he said.

Steel Mountain's loan portfolio is serviced by Wilshire Credit Corp., a unit of Merrill Lynch & Co. Inc., and Mr. Alread said that because borrowers send their payments to Wilshire, the borrower assumes that Wilshire owns the loan.

"Having NBKC call them and say they have a great deal, and the owner is willing to forgive some of the principal and pay the closing costs, makes the borrower very suspicious," he said. "There is strong emotion in people's minds that any offer is too good to be true."

For that reason, Mr. Geiman said, National Bank Of Kansas City often has the servicer send solicitation letters to borrowers on its behalf. It is working with six servicers, which also refer the bank to noteholders.

Unlike many lenders that have started underwriting government loans recently to stay afloat in the current environment, National Bank Of Kansas City is a relatively old hand in the sector. Last year 25% of the $1 billion of loans it funded were guaranteed by the FHA or by the Department of Veterans Affairs.

Mr. Alread said other banks are considering similar programs that would bring liquidity to investors. By facilitating a refinancing, the noteholder eliminates the need to get another appraisal, which likely would be lower than the original one as a result of falling housing prices, and it can avoid taking a big loss.

"It's fair to say that with the number of foreclosures and REOs on the market, servicers have their hands full," he said. "So it goes without saying that the owner of the asset is taking the lead in this."