A US private equity fund called First Equity Capital has been set up to tackle the problem of mortgage defaults in the US, following more than 300,000 mortgage foreclosure filings in December 2008.
The fund was established in 2008 by First Equity Mortgage and home insurance firm New Vision Title. The fund, which is still being raised and has approximately 25 percent of its $100 million target in soft commitments, is due to close within the next three months.
First Equity Capital will buy pools of badly performing mortgages, which are currently trading at significant discounts. The firm said it will then reduce the principal balances of the mortgages to reflect current market values, in order to create more manageable monthly payments for borrowers, so that they can keep up to date with payments and stay in their homes.
The distress of foreclosure
First Equity Capital purchases pools of between $3 million and $10 million which can contain up to 50 mortgages at a “massive discount”. This allows First Equity Mortgage and New Vision Title to restructure the mortgages in order to ensure that the mortgage owner can afford repayments, at terms which are eventually profitable for them. However, the firms can only contact the mortgage holders once the pool has been purchased, which means that they cannot pre-asses borrowers and this can result in foreclosure or short sale.
“There seems to be a consensus that the broader economy will not experience a meaningful recovery until the housing market stabilises,” John Child, a managing partner, said in a statement.
Child condemned the loan modification programmes which have been recently launched by the US federal government and institutions like JPMorgan, Citigroup and Bank of America to tackle the problems. “Many of these modifications are doomed to fail since so many borrowers are upside down on their mortgage and need some sort of meaningful principal reduction,” he said.
The fund will particularly focus on the state of New Jersey, which has the eighth-highest rate of foreclosure, according to the First Equity Capital website.
This is the first private equity partnership by the First Equity Mortgage and New Vision Title, who have a longstanding working relationship. Child, who was formerly executive director in equity derivative sales at Morgan Stanley, was hired eight months ago in order to set up the up the fund, as neither of the firms have previous private equity experience.