Treasury Urged to Bolster Performing Market

Washington-Treasury secretary Henry Paulson might consider buying performing mortgages, instead of nonperforming assets, as a way to increase liquidity and lending, according to a mortgage industry veteran.

Terry Couto, a partner in the consulting firm Newbold Advisors, says it is difficult today to convert loans into cash. "Bottom feeders are offering ridiculously low prices for nonperforming loans. It is now migrating over to performing loans as well," he said.

Banks might get only 70 cents on the dollar for a performing loan that should sell for 90 cents. If the government pays 85 cents, the bank could use the cash to cover the costs of servicing their nonperforming loans or increase their lending.

"There is a huge illiquidity premium out there today," Mr. Couto said in an interview.

The consultant served as the temporary chief financial officer for Countrywide's secondary marketing department from April through December of 2007.

Before starting Newbold Advisors two years ago, he worked as the CFO for several mortgage companies, including GE Capital Mortgage Services, Cherry Hill, N.J., in the late 1990s. He ran GE's special servicing shop and advises clients on servicing operations.

Treasury's plan to launch a troubled asset relief program is geared toward purchasing illiquid mortgage assets such as nonperforming loans, subprime mortgage-backed securities and collateralized debt obligations.

Based on testimony by government officials, Treasury would buy assets at a price that reflects future value since it can hold private-label subprime MBS to maturity.

But Treasury may be creating new problems when it comes to the servicing. If Treasury wants to transfer the servicing or leave it with the seller, it could be "disastrous," Mr. Couto said. It is just a "nightmare" to transfer a delinquent loan in the middle of a workout or foreclosure, he said. The mechanics of transferring the loan and recovering the servicers' advances are difficult. If the servicing is left with the seller, they may "back off" in terms of pursing loan workouts, Mr. Couto noted.

Servicers are finally staffed up enough to deal with the inflow of newly delinquent loans. But there is a backlog in processing loan modifications and short sales, he said. "People are just having a hard time keeping up with everything and they are going to focus on loans where they have credit risk."

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