Seizing an opportunity in a crisis
A big problem with the bad mortgages banks are holding is that nobody knows what they're worth. But for one Denver entrepreneur that situation spells opportunity. New York Bureau Chief Amy Scott reports.
Sue Allon, founder and CEO of Allon Hill. Her company aims to help investors buy pools of distressed mortgages. (Amy Scott / Marketplace)
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TEXT OF STORY
Kai Ryssdal: This being capitalism and all, the misfortunes of one company or, of a lot of companies, present certain opportunites.
As Henry Paulson said last week, the Treasury Department's not going to be buying up any troubled assets. Instead it's going to do more of what it's already doing: giving banks straight out cash in return for preferred stock. But don't be so quick to dismiss those toxic assets because there is a market for them.
The problem is that it's still really hard to figure out how much those bonds are worth. So you'd have to guess that anybody who can help put a price tag on them would be sitting pretty. Our New York Bureau Chief Amy Scott took a trip to Denver to meet an entrepreneur who's betting on it.
Amy Scott: You could say this is the sound of optimism. In this economy many companies are cutting back. Yet in downtown Denver, office workers are installing furniture for a new startup.
Sue Allon: So the furniture's arriving just in time for our party tonight, our open house. The guys are feeling a little bit of deadline pressure, am I right?
That's Sue Allon. She's CEO of Allon Hill. She started the company a few months ago to help clean up the mortgage mess. Right now banks are holding onto billions of dollars in soured mortgages and mortgage-backed securities. If the Treasury's revamped rescue plan works, Allon believes the banks will start selling those assets. She says investors like hedge funds are already lining up to buy them at a deep discount. And when they do, they'll need someone to help figure out what those mortgages are worth.
Allon: We expect to get phone calls any week now from big investors who have an opportunity to buy pools of loans. And we're preparing right now for what we would do if that happened.
They're preparing by lining up hundreds of people around the country to do what's called mortgage due diligence. They'll pore over mortgage documents to help investors separate the good loans from the iffy and the downright fraudulent. Sometimes all it takes is a lower interest rate to get borrowers paying again.
The investor makes money and the borrower keeps the home.
Matthew Burcham: This is our application that makes it all happen.
Matthew Burcham is a client service manager at Allon Hill. He's showing me a computer program that displays every detail of a borrower's loan and payment history.
Burcham: What the problem was in this loan, he was in the country illegally.
Turns out this borrower has gone back to Mexico and has no intention of returning or making payments. Using the software, Burcham can warn his client that the loan isn't likely to generate much cash.
Burcham: So we're just alerting them of the fact that, you know, there's a lot more here than just a loan that's not performing. And there's probably a reason why it's priced the way it is.
Scott: Why would anyone pay anything for this though?
Burcham: In some cases loans are worth zero.
Scott: But they're looking at a pool.
Burcham: So it brings the entire pool cost down.
Now, if you're thinking we could have used a little more of this due diligence during the housing boom you're right. In fact Burcham did this job at other companies. But when property values were climbing, and borrowers could keep refinancing whenever things got tight, Burcham says investors didn't really care about the specifics.
Burcham: I have to admit, I on a few occasions got sucked up into the mentality that you know the investors didn't care, why should I kill myself to point out the faults?
Burcham says when the downturn hit, he wrote a sort of mea culpa email to friends and family. Now he says he's excited to be part of the effort to fix the industry. I stuck around for Allon Hill's office party. Analyst Rick Joyner played a bowling video game in the conference room. With all the layoffs in the mortgage industry Joyner feels relieved to have a job.
Rick Joyner: The market is shrinking, and it's still shrinking. But there is money to be made right now. There's a bailout out there, there's Wall Street firms and hedge funds that don't know what their product is priced at right now. They're going to need our help, all of those people.
It may be a while before the business starts flowing. Last week Henry Paulson threw water on the party. He announced that the Treasury Department would hold off on its plan to buy troubled assets from banks. Sue Allon is optimistic that the Treasury's other efforts will get the mortgage market moving again.
Allon: You know, I'm joking that I'm a little crazy to jump in, but that's only because I'm jumping in before the revenues have started. And starting a business at this time, to most people just seems wacky.
In fact Allon says most of the tenants in her building are leaving because of the downturn. She's already planning to take over their space to make room for new staff.
In Denver, I'm Amy Scott for Marketplace.
Comments
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From Littleton, CO, 12/01/2008
I worked with Matt and for the company that Sue Allon purchased to assimilate into the company she's building now. That company did exactly what she intends her company to do, and they went under. It's hard to charge a reasonable amount of money per review. And then you get to tell the people that hired you the loans they are looking to buy are no good. It's an excellent practice and it works, but regardless of who is or isn't buying your services there's really not a lot of money to be thrown around. I don't want to speak for Matt, but I know for a fact I was warning people well more than 2 years ago that the current fraud protections and safegards lenders had in place for bad loans were no good, but getting that info into the right hands was difficult.
From Bronx, NY, 11/21/2008
I have worked in the industry for the past 8 years and its a breath of fresh air to finally see that someone has recognized what I have seen as beig wrong for the last 5 years which is investors didn't care as long as they thought they could make money. Now the crap has hit the fan. I think this is a good move on her part and I hope to be a part of her team.
From los angeles, CA, 11/20/2008
I highly recommend placing as much cash as you can into high-yield savings accounts at institutions like ShoreBank (Chicago), where capital is directed to projects with an environmental/green-sector focus. There is major long-term growth in green technology, and ShoreBank (in operation for over 30 years) is doing well despite the downturn. I work with ShoreBank promoting their High-Yield Savings Account, which offers a 3.5% APY, FDIC-insurance, and online/phone tools. It's one of the highest paying savings accounts in the US. Learn more by googling "shorebank direct."
From Graham, TX, 11/18/2008
Hurrah!! Let's put this runaway train back on track!
From South Orange, NJ, 11/18/2008
Allon sees the need for actual valuation of mortgages; she should be seen asan example to Secretary Paulson, the bulge bracket (ex)I-banks and holders of CDOs on what needs getting done, rather than have them continue to run away ...
Hmmmm... review an instrument, evaluate its value, report it transparently to move markets.
What a concept!
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