Wanted: More Trustworthy Mortgage Securitization

The Wall Street Journal’s “Activist Financier 'Terrorizes' Bankers in Foreclosure Fight” is juicy enough to qualify for the E! Network’s (CMCSA) True Hollywood Story or CBS’s (CBS) 60 Minutes. When you cut through the sensationalism, Bruce Marks’ Neighborhood Assistance Corp. of America (NACA) is executing an elaborate form of brand building for his niche of the mortgage market. He combines a $34.5M federally funded nonprofit mortgage counseling service with a captive mortgage brokerage.

Marks is marketing a club in much the same manner as Costco (COST), Sam’s Club (WMT) and even Abercrombie & Fitch (ANF) - though the Journal paints a much more unsavory picture of a cult rather than a club. Just like a cult, many members might not feel comfortable with the organization they joined. Members get the benefit of applying for low cost mortgages without being held back by moderate or poor credit scores. The price members pay is that they are forced to actively promote the NACA brand, and be associated with activities that include protests and a website calling certain bank executives “predators”.

NACA has agreements with Bank of America (BAC), Citigroup (C), JP Morgan (JPM) and Wells Fargo (WFC) to fund their mortgages and accept their counseling efforts on loan modifications. Marks focuses what the Journal calls “terror” on the banks that aren’t cooperating – HSBC (HBC), Barclays (BCS) and Credit Suisse (CS). Though unsavory, I think the Journal’s characterization of terror might be too strong.

The banks love/hate relationship with NACA centers on the 1977 Community Reinvestment Act (CRA). Banks are forced to issue mortgages to patrons with weaker credit in less desirable neighborhoods where they have branches. The bank solution of charging more interest for high risk often does not totally mitigate credit losses. NACA offers an unusual form of credit enhancement that makes the CRA borrower an equal to or a better credit risk than prime borrowers according to Bank of America. Banks pay NACA a fee of $2500 for each loan originated.

NACA originated $367M mortgages in 2008, insisting the all borrowers pay the same interest rate. The current rate is 4.875%. Each borrower must participate in extensive training on the responsibilities of home ownership and pay NACA dues for the life of their mortgage. Bank of America says few organizations prepare their borrowers as well. But the most important aspect of the credit enhancement is that members are required to participate in group protests and volunteer in the offices. This creates a cult-like environment where a member’s deviation from sound use of credit could be averted by group pressure.

Marks’ theory is that all credit risks are equal after education, so all members should pay the same interest rate and are entitled to a no down payment mortgage loan. NACA tries to insure that borrowers are not overreaching as part of its underwriting process. Marks’ logic is that borrowers past sins will not be repeated, so they should not be punished for them. Part of the membership dues goes toward helping members with mortgage payments when they temporarily are unemployed. The Journal gives few details on the performance of NACA originated loans.

My real interest is not in the good or bad of what I call NACA’s branding activities. Readers can go to the Journal and pass their own judgment. The real question is can banks emulate the best of NACA in a character based lending system on their own, and do they even want to?

NACA’s organization and brand building activities are very labor intensive and are not practical to, as Intel (INTC) says, “copy exactly.” But banks can implement required home ownership education and continuing group credit counseling in exchange for lower interest rates and fees. Perhaps give PMI rebates as long as borrowers attend monthly credit checkups or audits. Even experienced homeowners could benefit. The refinancing bubble has shown that the distance between responsible and irresponsible use of credit is short.

The want question is more difficult. Creating the excess baggage of group pressure on a bank’s customers could be a competitive disadvantage during times of easy credit. NACA’s business declined during the subprime bubble, even though they offered much greater value to buyers of moderate to lower priced homes. And during good times realtors are likely to steer clients to banks and mortgages brokers that accept both their good and bad credits hassle free.

It all boils down to whether reduced credit risk is an important competitive advantage in a weaker shadow banking environment. With the mortgage securitization market currently limited to Fannie Mae (FNM), Freddie Mac (FRE) and FHA, banks need to start sowing the seeds now for a more trusted mortgage securitization product. Perhaps there is something to be learned from Bruce Marks.

Disclosure: Author is long BAC, C, FNM, FRE and WFC.

Comments

[Mike Durland:]

NACA promotes irresponsibility, not justice

read my full comments on my blog.
mikedurland-reallife.b.../

Jun 13 06:49 PM

[Mike Durland:]

NACA is currently taking advantage of people desperate for a job. They hold long indoctrinating job fairs that trick people into volunteering for the organization for a chance to "show off their skills".

Jun 13 06:53 PM