January 1, 1995
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 Di Mercurio|
|Title||Executive Vice President|
|Company||FGB Realty Advisors Inc|
|Subsidiary Of||First Nationwide Bank|
|Sister Company||First Nationwide Mortgage Company|
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.”
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.
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.
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.”
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.
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.”
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:
“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.”
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.”
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.”