Private equity and hedge fund firms are capitalizing on the remaining inventory of the mortgage crisis – more than 100,000 troubled mortgages have been purchased. As the housing market continues to recover, these new financial players had previously been welcomed as offering more flexible terms for delinquent borrowers than big banks.
Recently, these firms have come under fire. Housing advocates and attorneys who represent borrowers contend that private equity firms and hedge funds are too quick to push homes into foreclosure and have become less helpful than banks in negotiating loan terms. Their actions have also gotten the attention of Federal and state lawmakers who are questioning why federal agencies are selling loans at a discount of as much as 30 percent to these firms.
An investigation by The New York Times of housing data, court filings, and interviews with borrowers and attorneys reveal a pattern of complaints against companies like Lone Star Funds, a $60 billion private equity firm. It is reported that Lone Star has been quick to begin foreclosure proceedings, whether they had bought a delinquent mortgage at a federal auction or directly from a bank. The company reportedly “dealt harshly” with borrowers’ requests for loan modifications.
A closer look reveals Lone Star’s biggest deal — a bundle of 17,000 distressed mortgages that had an unpaid balance of $2.96 billion. With money from public pension funds, Lone Star bought those mortgages in the summer of 2014 at an auction held by the Department of Housing and Urban Development.
Not all of private equity’s push into the distressed mortgage market has been negative. Thousands of homes that were abandoned by borrowers are now back on the market. Still, many housing advocates argue that federal housing agencies should make it easier for nonprofit organizations to have a better chance to compete for troubled mortgages, because these groups would work harder to avoid foreclosures.
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