Having survived the subprime bust and the collapse of its former parent, NoteWorld LLC, the largest servicer and a major buyer of seller-financed mortgages, is searching for opportunities in a reshaped environment.
Linda Remsberg, NoteWorld's chief executive officer, who bought the Tacoma company from C-Bass LLC late last year, said seller notes are being used to help troubled homeowners avoid foreclosure. The homeowner can sell the house for a note instead of cash and then use income from the note to pay his mortgage. "A seller goes to their lender and says, 'Look, I'm in trouble, but if I sell my home' " through such a transaction, " 'I can continue to pay this. If I have it serviced by a third party, will you guys not call my loan?' "
NoteWorld is looking to profit as the third party in such situations and in other opportunities created by the credit crunch. It services about $4 billion of contracts, 50% to 60% of them loan agreements struck between home sellers and buyers. (The contracts also include leases.) It also continues to buy seller-financed notes for its own portfolio, though it no longer buys them to package into bonds because of the breakdown in the asset-backed market over the summer.
Ms. Remsberg said purchasing notes for the company's portfolio has always been better suited to the unconventional characteristics of peer-to-peer loans, and that there are more opportunities for such an approach now that many competing investors are out of the picture.
And even though seller notes still primarily encompass irregular property types and borrowers who do not meet the criteria required by typical lenders, Ms. Remsberg said NoteWorld has observed an inflow of buyers and sellers forced to seek alternatives by the credit crunch. "Now we're looking at brand new homes that are in the $500,000-$2 million price range that they're talking about seller finance," she said.
Though she would not identify specific companies, she did say, "A lot of … builders and major investors — some of your large companies — are … taking the capital that they have and using it to carry their own loans."
The niche is "still primarily sellers or small investors who are buying the property and carrying the loan, charging 9% to 14%," Ms. Remsberg said, but that picture has become "less true."
"The other type of product we're seeing is builder and seller incentives," she said.
Ms. Remsberg said builders were behind large expansions of seller finance during periods of tight credit in the 1970s and early 1990s.
She joined NoteWorld in 1998, the same year C-Bass (a joint venture of MGIC Investment Corp. of Milwaukee and Radian Group Inc. of Philadelphia) acquired it, as an executive vice president overseeing the core servicing business. She became the unit's CEO in August, when Patrick Weller retired. Mr. Weller had focused on building NoteWorld's note purchasing business, which had added a broker channel to feed C-Bass' securitizations.
But C-Bass eliminated that outlet in July and August as it faced a slew of margin calls that eventually would lead the company to adopt a liquidation plan under an agreement with creditors in November.
Under that plan, C-Bass sold its large subprime servicing unit, Litton Loan Servicing LP, to Goldman Sachs Group Inc. and sold NoteWorld to Ms. Remsberg.
Despite the turmoil at C-Bass, NoteWorld was "still a very profitable, valuable company," she said. She was attracted to the investment in part because NoteWorld had just finished a "major infrastructure" and technology upgrade.
The closing of the securitization market to seller-financed notes "caused quite a ripple for a while," and investors became "much stricter on what they would actually buy," Ms. Remsberg said. "Everybody got more cautious."
But the pullback has led to opportunities, she said. "If you're not securitizing … then you're able to expand the criteria that you'll buy notes through."
Bond investors were never an ideal constituency for seller notes, she said. "Most securitized vehicles do not understand the seller-financed note, so they will create obstacles to buying the note when the note is still a very valuable note. By moving away from securitization as a funding source, you're able to take advantage of the marketplace, so we're very optimistic right now about those opportunities."
Even when it was active, Ms. Remsberg said, "C-Bass was actually a very cautious securitizer. While they now don't have that reputation, they were considered very conservative in the business they would take on."
NoteWorld has no plans to restart the securitization channel, Ms. Remsberg said, citing the "volatility" of such funding. However, it plans to increase its purchases of notes from servicing customers.
The note-buying business complements the servicing business, she said. Servicing customers "may not even understand that the payment stream that they've now put together is a valuable asset to them, and that they can know the value of that note," she said. "Also, because we're providing a payment history, and maintaining the documents … for them, the note has more value … should they decide they're going to sell it."
Despite a broad deterioration of credit quality in real estate loans, "we do not see any increase in the foreclosure rate in our seller-financed loans at all," Ms. Remsberg said.
Last year Virgin USA, the North American arm of Sir Richard Branson's Virgin Group PLC, bought CircleLending Inc., a U.S. arranger of peer-to-peer loans, including seller-financed mortgages, and rechristened it Virgin Money USA.
But Ms. Remsberg said that venture is not a direct competitor with NoteWorld. "They service family loans. We service seller-financed loans. We have a very strong emphasis on marketing to large investors, builders, real estate brokers who are doing volumes of business," she said.
"The strength of seller finance is that it's stable," Ms. Remsberg said. Volume "eked up during 2004 and 2005, when it seemed like everybody was buying and selling real estate … and it slid down a little bit in 2007, but it's never such a drastic move that you aren't able to adjust accordingly."
