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64 model is based on reaching borrowers and getting modifications … getting them to perform is how they and the new investors maximize their returns." is is a philosophy the protestors who turned up in late September strongly oppose. Warren and Capuano issued a warning during the protest, suggesting hedge funds and investors running off with nonperforming loans will cut their losses early, foreclose, and essentially give up on the issue of helping distressed borrowers. While there is a side that clearly disagrees with this notion, Warren has found unexpected alliances on the issue. Dick Bove, an equity research analyst at Rafferty Capital Markets, is generally not a Warren defender. Bove often rallies against what he considers the nationalization of big banks, but in this case, he is not negating Senator Warren's opinion. "As an active observer of the industry, I would be 100% in Elizabeth Warren's camp on this, although I am almost never in her camp on anything," Bove said without a dose of irony. "When you ask yourself why are these distressed funds buying these financial instruments? ey're not buying them because they want to be in the housing business. e reason why these companies buy things is because they are seeking a quick turnover on their money, and you don't get that if you're offering HARP loan modifications where you are reducing the rate or the principal in order to benefit the homeowner," he added. Bove believes the target investor in this case is a private equity firm or a pension fund that "traditionally would not have any interest in financing housing at normal rates." He added, "ey are interested in capturing an above average return by buying these loans, and then foreclosing on those properties or forcing the residents to restructure or refinance." Bove's understanding of Sen. Warren's concern that the properties will not end up in the hands of homeowners is not a shock to Ed Gorman, Chief Community Development Officer for the National Community Reinvestment Coalition (NCRC), a coalition that advocates for affordable housing and options for underserved communities. "is is an issue that makes for strange bedfellows," he explained. "What we have here is a very traditional view of the market." Gorman added, "As Fannie and Freddie sell off these notes, the health of neighborhoods should be the top priority – not an afterthought. We are perhaps the true conservatives here in that, we really believe in the American dream. We believe that everyone should have opportunities to build wealth, and about 80% of the country does it through homeownership. So when these notes are bought en masse by parties that convert the properties into high-cost rentals, it's bad for American families." "When you own a home, there is an inherent level of care about the property because you are preserving and maintaining it, as both a home and an investment. You care more about neighborhoods and invest in the schools in the areas where they live in." Gorman further pointed out that when interest rates are low it should be a simple consumer choice to turn towards homeownership, but factors are creating a market where consumers are at the tail-end of all considerations. But there is another side of the market that remains strongly in favor of the NPL sell-off. One of the more convincing arguments is the fact the FHFA was never designed to be a major servicer and has a clear mandate from Congress to wind down the GSE investment portfolios. Stein with FHFA notes that the NPL sell- off deals include provisions that force servicers associated with the buying investors to look into home retention and foreclosure prevention options first – creating a waterfall effect, where a foreclosure only takes place after exhausting other remedies. For the pre-2009 borrowers, servicers are required to offer each borrower the option of qualifying for HAMP, and to try and "establish the right party of contact with everybody to evaluate them for modifications and payment reductions," Stein said. "ere is a list of guidelines and a process that servicers must follow. If a modification is not successful, they will evaluate them for other foreclosure prevention options. e last line of defense is the deed-in-lieu process, right before foreclosure, which is absolutely the last option." And if a home does end up in foreclosure, Stein says the servicer can only sell the home to a nonprofit or an owner-occupant for the first 20 days it markets the property. Considering Fannie Mae has carried these lingering loans from the pre-financial crisis days, Stein sees the process as a necessary next step. Ron D'Vari, CEO and co-founder of advisory firm NewOak, follows the secondary mortgage market and believes allowing investors to hand these loans off to specialty servicers is one of the best bets at this point. "I think the handling of nonperforming loans is a very specialized field," he explained. D'Vari noted that GSE servicing is often less flexible which can unintentionally prevent servicers from finding optimal solutions for borrowers. "e GSEs themselves don't get involved in servicer oversight that much on a loan-by-loan basis, whereas, private investors are often behind the scenes active and ready to move on to get closure," D'Vari explained. Home price appreciation has already occurred, collateral value is a lot more stable and often can be optimized, he added. D'Vari noted that private sector servicing is often much more fluid in its approach. He describes the GSE servicing contracts as being akin to a "machine making a decision," they are not as incentivized or able to create the best solution and the loans often linger in a distressed state, creating further stress for borrowers and communities. Specialty servicers working with a private firm often do have the ability to be engaged and attentive to each loan, he claims. "My view is that this is a win-win solution for the owners of the paper and the borrowers," D'Vari added. "Sometimes getting to the best solution requires someone who can make a decision on the spot as opposed to kicking it off to three other decision makers." "It is going to be a different servicer making an effort. Most of the borrowers have been delinquent for several years by the time the loan is sold, so a bit of a change of voice, itself, I think will be helpful." – Eric Stein, Special Advisor to FHFA Director Mel Watt

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