Boring? Not For A Minute!

January 1, 1995

Loans and Mortgages

This profile by Ruth Guillet Fields was orginally published in publication in 199X. 

You might say that Tom Di Mercurio finds performing loans boring. He doesn’t actually say that, hut you sense it when talking to him about his work.

“It's fun.” says an enthusiastic and sincere Di Mercurio, who is execu­tive vice president of FOB Realty Ad­visors Inc., a servicing company in Tulsa, Okla. that specializes in non- performing loans, outsource loss mitigation and REO sales and man­agement.

Tulsa is located in what’s known as Tornado Alley, a section of the country prone to that particularly nasty weather phenomenon. Di Mercurio says he’s waited out a few tor­nado warnings and watches, but has never experienced one – except in the new movie “Twister,” which he says is quite popular among Tulsa filmgoers.

“Twister” has some real edge-of-your-seat-scenes and that’s probably part of the movie’s appeal for Di Mercurio. Taking on non-performing loans is edge-of-your-seat servicing. There’s nothing boring about it.

Tom DiMercurio

Tom Di Mercurio
TitleExecutive Vice President
CompanyFGB Realty Advisors Inc
LocationTulsa, Okla
SpecialtyNonperforming loans
Subsidiary OfFirst Nationwide Bank
Sister CompanyFirst Nationwide Mortgage Company

Some background

FGB Realty Advisors was formed in 1989 as an asset disposition unit of First Gibraltar Bank of Texas, “hence the FGB,” explains Di Mercu­rio. First Gibraltar Bank sold most of its Texas operations to Bank of America, according to Di Mercurio, which left a small thrift – First Madi­son – of which FGB Realty Advisors became a subsidiary. First Madison had four branches in Texas and it ended up purchasing First Nation­wide Bank FSB in California, “sort of like the small fish acquiring the big fish,” Di Mercurio says, in 1995 and adopting the better-known bank's name. FGB Realty Advisors then be­came a subsidiary of First Nation­wide Bank.

At its inception in its Tulsa loca­tion, FGB Realty Advisors was work­ing with the Resolution Trust Corpo­ration “to handle the consolidation of nonperforming residential loans for four or five consolidated Okla­homa thrifts,” Di Mercurio says. It performed third-party niche servic­ing for Wall Street and other in­vestors that were purchasing those nonperforming assets.

“The year 1992 was the high wa­ter mark for RTC auctions,” he says. “A lot of our clients acquired these loans, but were not in the servicing business per se, so they were look­ing for a service like ours. We have serviced, or continue to do so, for Citicorp Securities, CS First Boston, Nomura Asset Capital, PaineWebber, and for Kidder Peabody until it went Twister1 has some real edge-of your-seat scenes and that's probably part of the movie's appeal for Di Mercurio. Taking on nonperforming loans is edge- of-your-seat servicing. There's nothing boring about it out of business. We also service sev­eral securitizations of subperforming and nonperforming loans. About a year ago, we started doing work for our parent, First Nationwide Bank, and for our sister company, First Na­tionwide Mortgage Company, which was the old Standard Federal in Frederick, Md. That operation now services 844,125 conforming loans ... and what we also do is third-party business, which consists of a num­ber of products.”

Several hats

For their Wall Street clients, FGB Realty Advisors acts as a full-service servicing operation, Di Mercurio ex­plains. The difference is, where the standard conforming portfolio might have an average of 4% in nonper­forming loans, these portfolios have about 85%.

“Everything is an exception, a delinquency,” Di Mercurio says. “We are the servicing platform: we do the investor reporting, all the loss miti­gation work and foreclosure man­agement. If it becomes an REO, we dispose of the REO. It's basically a soup to nuts servicing operation for those clients.”

Recently, the company also segre­gated some of its services in re­sponse to client requests.

“We do 1,500 to 2,000 broker price opinions (BPOs) a month – some for our loans, some for pre­foreclosure or due diligence values – and we leverage the fact that we’re dealing with 3,500 real estate bro­kers on a consistent basis because we have a big REO portfolio,” Di Mercurio says.

“We also do loss mitigation work for clients that want that – essentially for our parent – and then some REO work for clients. Again, we leverage our contacts and work through our broker network in terms of liquidat­ing REO as quickly as possible at the best possible price.

We’ve crafted our menu of ser­vices around the deals we’ve done,” he adds.

Handling the workload

The company has 120 full-time employees in Tulsa handling the workload: $532 million hi managed assets, consisting of about 3,000 nonperforming loans and about 1,880 properties.

“Because of the unique nature of the way our business has evolved, we are staffed differently than any other organization 1 know,” Di Mer­curio says.

The infrastructure includes people that perform routine servicing tasks, he says, “although very little of our payment processing goes through a lock box because most of the loans are in foreclosure or bankruptcy and we have to look at a payment to make sure that by accepting it, we haven’t technically cured a foreclosure.” Pay­ments are processed manually

The company’s servicing platform was recently converted to CPI/ALL­TEL (the First Nationwide link has been via CPI since the purchase). It is used to do adjustable-rate mort­gage adjustments, produce payment coupons, perform escrow analysis and process tax payments.

The investor reporting/accounting department “is a large department by virtue of the customized nature of the reports we provide our clients,” Di Mercurio explains. “Basically, our Wall Street clients are interested in summary level, pool level and asset- specific detail, both of a financial na­ture and management nature. At the inauguration of the relationship with the client, we sit down and find out what kind of information they want us to report on.”

The reports are delivered both in hard copy and electronically. “Of course, we charge more” because of the specialized nature of the report­ing, Di Mercurio says, which for one client includes profit and loss state­ments.

Heavy into valuations

A large component of the compa­ny’s business is valuations and there are eight to 10 people at all times assigned the responsibility of order­ing and tracking appraisals and BPOs.

“We have invested in a system we’ve developed which allows us to manage that, process,” Di Mercurio says. “We select vendors and com­municate with them electronically, with highly customized forms that we program based on requests.”

“Then you get into the deal-doers, the people that actually do the trans­action for us,” Di Mercurio says.

On the workout and litigation side, there are four attorneys and 12 paralegals on staff. The paralegals monitor the files and report to the attorneys.

“We’re not handling cases in ju­risdictions,” Di Mercurio explains. “These people are managing people in 50 states – attorneys or trustee companies. Our paralegals interface with these attorneys and monitor the performance of outside counsel. We’ve developed this approach be­cause it is the most meaningful and produces the best results for us.”

Sitting next to each paralegal is a workout officer.

“They share about 80% of the same files, hut the perspective on the transaction is different,” he ex­plains. “The workout officer is al­ways trying to do a deal,” while the paralegal is pursuing the foreclosure or bankruptcy option simultaneously as to not waste time which, of course, translates into money.

“We’ve got that situation where the assets are always being double­worked,” Di Mercurio says. “The workout officer is always trying to pull the loan out of foreclosure and arrange a deal, and the litigation of­ficer is trying to push forward.”

Information is king

When it comes to servicing non­performing loans, you can never have enough information.

“At the initial conversion of a loan, we will accumulate as much data as possible about the property and borrower,” Di Mercurio ex­plains. “We request financial infor­mation from the borrower, get one or two BPOs, credit information, in­spections.”

“On a workout,” he continues, “we try to decide what kind of work­out is best based on the direction from our client, and the asset. Our approach to intervening with the borrower is very focused. We get all current information, of course re­view all the system-generated infor­mation on collection calls, etc., and gauge the interest level of the bor­rower to do something. We propose a very specific transaction to the borrower.”

Sometimes, Di Mercurio says, a nonperforming loan is “an REO in process regardless of what you do.” The key is to identify these loans and move them along as quickly as he says. “We try not to pursue a reso­lution strategy that does not appear to be headed toward some reasonable fi­nal conclusion and, as a consequence, we do many pre-sales where we inter­vene and indicate to the borrower, based on the information we have and the feedback from them, that the best thing to do is aggressively market the property. To the extent we can, we try to get the borrower to craft a deal that makes the most sense all the way around.”

Sometimes that means paying the borrower to turn in the keys and get out of the house.

Time is a consideration

In some states, like Texas, it’s pret­ty easy to foreclose on a property. In others, like New York, New Jersey and Connecticut, it’s like pulling teeth with medieval dental equipment.

“In Texas, where it’s fast and doesn’t cost very much, we almost never take a deed-in-lieu,” Di Mercu­rio says. “In New York and New Jer­sey, not only might you negotiate away the requirement for the bor­rower to pay you (the deficiency), you might actually pay them (be­cause of the 12 or 15 months it can take to foreclose) ... and just stop the bleeding and offer them $5,000 for a deed-in-lieu.”

“As borrowers have become in­creasingly aware of their ability to prolong the situation, it’s been more difficult to strike those deals,” he adds. “A whole part of the legal pro­fession has developed to educate borrowers on their ability to frus­trate lenders in their efforts to col­lect on their loans.”

In judicial states, where it can take four to six months following foreclo­sure to get the borrower out of the house, the company sometimes offers its cash-for-keys program. The compa­ny will provide a borrower, say, $2,500 to help them move “because maybe that’s the reason they can't ... and we get back the asset faster and, instead of paying attorney fees (to evict) we’re giving the borrower the impetus to move.”

“A lot of it is financial analysis,” Di Mercurio explains. “We have monitored our outside vendors, at­torneys for instance, very carefully and we have an extensive list of ex­ception reports. We have managed the process carefully.”

Taking action fast

In addition to managing nonper­forming loans a client acquires, the company has a special arrangement with several clients that also own performing loan pools.

“At the 90-day (delinquency) mark in the performing pools, they will transfer the loan to us,” Di Mer­curio says. “It’s kind of a flow deal, as opposed to a structured deal where they bought a pool of bad loans and sent that to us.”

Part of the company’s strategy – and success – is identifying “when we are incapable of salvaging a loan,” he points out

When a property becomes an REO, “we work very closely with the broker to get the property listed and sold quickly,” he says. The REO department is “one-dimensional as compared to the loan workout side.”

“It’s very simple,” he explains. “Sell the property for as much mon­ey as possible, as quickly as possi­ble. We manage that process by ex­ception reports.”

Among the considerations:

  • If a property has been ap­praised and a BPO delivered, why hasn’t it been listed?
  • Why doesn’t the property have a contract after 90 days on the market?

“A lot of what we do is generic in the sense that it is a general ap­proach to business,” Di Mercurio says. “Some of it is specific accord­ing to client directives. We typically have a servicing agreement and a business plan with each client, then jointly decide how we’re going to work the asset.”

Loss mitigation is “in”

In refocused their loss mitigation ef­forts. Servicers have been put on no­tice that they must work smarter and harder; they've been told that if they need help, ask for it.

“Fannie Mae and Freddie Mac are cranking up their loss mitigation ef­forts because, frankly, their analyses of the performance of servicers has not satisfied them in terms of reme­diating nonperforming loans,” Di Mercurio says. “They’ve come up with programs to incent servicers” as well as issue new guidelines.

For two years in the mid-1980s, Di Mercurio was a manager of prop­erty disposition sales for Fannie Mae in south Texas and Louisiana. He says that many of the property dis­position efforts he and his staff initi­ated in that Fannie Mae office are still in use.

“A performing loan operation, which can be quite successful, breaks down on the nonperforming side,” he says. “In most shops, there isn't a way to offset expenses, but that's where a lot of the expense is.”

FGB Realty Advisors, like other nonperforming loan servicers, makes its money by charging higher fees. That extra money enables the company to dedicate resources to the tasks at hand.

“This whole loss mitigation effort (on the part of the secondary mar­keting giants) is something we've been doing all along,” Di Mercurio says. “It is improving what otherwise would be a payout of X amount of money and doing that by interven­ing, taking control of the loan and making something that, on its own, won’t happen.”

Foreclosure, he adds, “doesn’t support anybody’s best interest.”

Today’s trends

Fannie Mae’s and Freddie Mac’s new approaches toward loss mitiga­tion are to be applauded, Di Mercu­rio says.

Some of this has come about be­cause of increased delinquencies over the past several quarters and recent reports that loans originated in the post-refinancing boom are showing early signs of trouble. (See Servicing Management, May 1996, page 27.)

“The California market is, I think, pretty weak, with Orange County the weakest,” Di Mercurio says. “Arizona is very strong, as is Colorado – in contrast to several years ago when they had their problems. Northern California is doing rela­tively well.”

He says the true problem areas are those where it's “most difficult to do business on the default side” plus judicial foreclosure states, along with the previously mentioned New York, New Jersey and Con­necticut.

He also sees a lending trend as possibly stimulating more business for FGB Realty Advisors and other nonperforming loan servicers.

“We're alive to the possibilities that might exist in the increase in B and C lending, a product that lends itself by definition to a higher level of servicer review and, perhaps, a higher ratio of default.”

Bad times mean good times for some.

“It’s fun,” Di Mercurio declares of his career. “It’s a combination of servicing, workouts, developing new business relationships and maintain­ing them. It’s a lot of things and it requires a multi-dimensional focus.”

“I've been in the problem loan business for 20 years now (and) it's interesting to see the evolution,” he continues. “I believe there is a tremendous opportunity to do the business better. Borrowers are go­ing to have problems; it's part of managing loans. Servicers have to be attuned to that and to the trends in the marketplace. You don’t have to do too many workouts to improve the investor’s position. As we em­phasize in our advertising, ‘We're not talking peanuts.’ There are big bucks at stake.”

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