ResCap is a unit of what was formerly known as GMAC
Editor’s note: This story has been updated as of 10/24/12 with the bankruptcy results.
FORTUNE — Waterloo, Iowa’s sixth-largest city, is a blue collar community located off I-380, the “Avenue of the Saints” that runs from St. Louis to St. Paul. Go a few blocks from the Crossroads mall in west Waterloo, and you find something atypical: a big white collar employer, Residential Capital LLC. ResCap, as it’s known, is a mortgage company located on a nicely landscaped 17-acre campus. Its 950 Iowa employees get wages averaging about $35,000 a year — pretty good money for Waterloo — along with health insurance, tuition assistance, and other benefits.
Inside the complex, you run into people like Tracy Zobel, who radiate a Midwestern work ethic and aw-shucks charm. Zobel, 44, a mother of four married to a dairy farmer, has spent 18 years working her way up from part-time call center rep to vice president in charge of loss mitigation. She loves ResCap, loves her job, and loves the fact that she’s the source of health insurance for her family.
“Our culture is one of my most favorite aspects — the friendships and just the way we work together,” she says. “We work very hard and we enjoy what we do and each other. It’s just a unique culture where you’re doing the right thing for the right reasons.”
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If this all sounds almost too bucolic and wholesome to be true — well, it may not be true much longer. Waterloo’s future could be determined by an auction being held 1,059 miles away, at the Sheraton New York Hotel in midtown Manhattan, on Tuesday.
At the auction, ResCap, a former high-flying General Motors (GM) subsidiary that tumbled into bankruptcy in May, will find out how much bidders are willing to pay for the rights to service the $365 billion of mortgages that it currently handles. (We’ll explain “servicing” in a bit.)
The auction’s outcome will likely determine whether most of ResCap servicing employees will keep their jobs — and whether the troubled mortgage borrowers that they work with will continue to deal primarily with American loan servicers, as they do now, or with servicers in the Indian cities of Bangalore and Mumbai.
This auction reflects two of the biggest issues in the current political debate and presidential campaign: good U.S. jobs, and corporate America practicing extreme tax avoidance at a time of huge revenue shortfalls.
Whatever happens at ResCap may also become a template for the mortgage servicing industry, which employs tens of thousands of U.S. workers, many of whose jobs are vulnerable to being outsourced unless Fannie Mae and Freddie Mac — the “government sponsored enterprises” that are the biggest players in the mortgage biz — adopt regulations forbidding or limiting it.
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But none of the social questions — outsourcing of jobs, treatment of troubled customers, moving profits (totally legally) into tax havens — will play a role in Tuesday’s auction. It’s all about bankruptcy law, which is concerned with creditors’ rights and debtors’ obligations, not with social issues. Wall Street concerns — ResCap’s debt is owned primarily by professional investors — trump the Main Street concerns of employees, vendors, and borrowers.
“What we call the ‘highest and best’ bid is what prevails in bankruptcy court,” explains Stephen Lubben, a respected bankruptcy expert who teaches at Seton Hall University, “and ‘highest and best’ means what’s best financially for creditors, not for any other party.”
So what’s “servicing”– and why are such jobs so vulnerable to outsourcing? Here’s how it works: Servicers collect mortgage payments from borrowers, send checks to mortgage owners for the interest and principal repayments due them, and pay borrowers’ real estate taxes and homeowner insurance. These days, servicers also spend lots of time and effort working with people unable (or unwilling) to make their mortgage payments.
In return, they typically get an annual fee of about 3/8ths of 1% of the loan’s unpaid balance — $375 a year on a mortgage with a $100,000 balance — and have the interest-free use of homeowners’ monthly tax and insurance payments until it’s time to pay those bills. It’s a lucrative business if you’re big and efficient enough — and you can do it from anywhere in the world.
Because of regulatory changes, banks — traditionally the biggest players in the servicing biz — are paring back their portfolios. This is leading to the rise of non-bank servicers, like the ones we’re about to meet, who hold the fate of our friends in Iowa in their hands.
The first two — polar opposites — are the known bidders for ResCap’s servicing portfolio. The first is Ocwen Financial, which has bought servicing portfolios from the likes of Barclays (BCS), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), Lehman Brothers, and Bank of America (BAC).
As best we can tell, Ocwen has moved virtually every American job in the portfolios it’s bought to Bangalore and Mumbai. It would presumably do the same to the ResCap portfolio, absent any restrictions on moving the jobs. This is perfectly legal—and employing folks in India is much cheaper than hiring Americans in places like Waterloo.
In addition to having cheap labor, Ocwen also has low taxes. It recently moved its servicing subsidiary’s headquarters to a special Virgin Islands tax zone. Thus, it remained a U.S. company eligible to participate in federal programs — but it gets 90% of its U.S. corporate taxes forgiven.
We can’t give you Ocwen’s version of any of this — even though we asked several times, Ocwen declined to speak to us about anything, or even to help us check our facts.
The other known bidder for the ResCap rights is Nationstar Mortgage, controlled by the Fortress Investment Group (FIG). As a publicly-traded private equity house, Fortress is taxophobic in its own business — but Nationstar is sending ever-larger checks to the Treasury, despite having tax-loss carryforwards on its books. That’s because it can use only about $11 million of its almost $200 million of carryforwards in any given year.
Nationstar proudly tells all and sundry that all its employees are in the U.S., and that it’s a “high touch” servicer. “High touch” is marketingspeak for “trying to provide really good service.” For example, Nationstar says it assigns an account officer to every troubled borrower, so that that the borrower is always dealing with the same person, rather than getting whoever happens to be free. The theory is that providing better and earlier service to borrowers, especially troubled borrowers, improves the performance of the loans being serviced.
Nationstar is the “stalking horse bidder” in Tuesday’s rights auction, which may spill over into Wednesday. This means that it will win the auction unless someone tops its $2.45 billion by at least the $20 million breakup fee Nationstar gets if another buyers prevails. Nationstar would keep ResCap servicing in the U.S., though it would probably cut some of the existing jobs.
(A few months ago, Warren Buffett’s Berkshire Hathaway made a pitch for the servicing business that forced Nationstar to improve its bid. However, Buffett doesn’t seem likely to be a player Tuesday.)
Ocwen has a less-than-wonderful relationship with Fannie Mae, which is the biggest player in the mortgage biz and would have to approve any transfer of servicing rights on its mortgages, which are the majority of ResCap’s servicing pool. Hence a third company, the Green Tree subsidiary of Walter Investment Management, is hovering around the auction.
Like Nationstar, Green Tree is a high touch servicer that hires people in the U.S., and has a good relationship with Fannie. Green Tree has apparently combined with Ocwen to bid jointly on the portfolio. If they have in fact combined, and prevail at the auction, it seems likely that a good number of ResCap servicing jobs — but not all of them — would be outsourced. (Green Tree and Fannie both declined comment.)
Even though Fannie has never made formal announcements, people in the industry say that Fannie has sometimes insisted on servicers keeping a U.S. presence before allowing them to take over the rights to service Fannie mortgages. Fannie is said to be considering issuing rules restricting transfer of servicing of Fannie mortgages out of the country — but so far, it hasn’t done so.
Meanwhile, folks in Waterloo wait and worry about the auction results. “When I started, I was 21, I was a kid,” says Sharon Robinson, who in 28 years has risen from mail clerk to a top consumer-service post. “I wanted full time employment and benefits and I was just going to stay here until I found something better. And I haven’t found something better; I’ve never even had a reason to look.” After next week, however, that may no longer be the case.
Update, 10/24/12: ResCap employees got bad news Wednesday, when Ocwen Financial won the bankruptcy-court auction for the right to service the bankrupt firm’s $365 billion mortgage portfolio. The auction began Tuesday, but carried over to Wednesday morning.
Ocwen, which has outsourced thousands of U.S. mortgage-servicing jobs to India after buying portfolios from the likes of Goldman Sachs, Bank of America, and JPMorgan Chase and is based in a special low-tax zone in the Virgin Islands, bid about $3 billion for the ResCap portfolio. This topped a somewhat lower bid by Nationstar Mortgage, a Texas-based “high touch” servicer that prides itself on having only U.S.-based employees.
It’s not clear if any of ResCap’s 2,000 mortgage-servicing employees will keep their jobs, or what will happen to ResCap’s 1,800 or so other employees.
Ocwen didn’t respond to an e-mail I sent asking about this. Walter Investment, a high touch servicer that associated itself with Ocwen’s bid, didn’t respond to an e-mail, either. It’s possible that Walter will administer part of the ResCap portfolio and keep some jobs in the U.S., but at this point, there’s no way to tell.
The ResCap employees’ best hope is that Fannie Mae, the government sponsored entity that is the biggest player in the mortgage business, will have both the will and the ability to impose job-outsourcing restrictions as a condition of approving the transfer of servicing rights on its mortgages, which are a large part of the ResCap portfolio.
Nationstar, a publicly traded company controlled by the Fortress Investment Group, said it had dropped out of the bidding because the price had gotten too high to “represent a compelling investment for us.” Nationstar stands to get a fee of about $20 million for having been the “stalking horse” bidder that had agreed to pay about $2.4 billion for the rights even if no one else bid for them.
As I write this, Nationstar (NSM) stock is down 12% on the day, while Ocwen and Walter are each up about 6%.—Allan Sloan
With Erika Fry in Waterloo
