Homeowners vs. Home-Loan Buyers

By RUTH SIMON

Eddie Patrick thought he had a deal with Kondaur Capital Corp. to restructure the mortgage on his Baltimore house after he fell behind on his payments. The 54-year-old taxi driver dropped a lawsuit against the company after he says it promised to "work with me" on a loan modification, according to a court filing.

Kondaur foreclosed anyway—and then offered to sell the house back to Mr. Patrick for $140,000. "I don't know why they are so inhumane," he says about the Orange, Calif., company, one of the nation's largest buyers of troubled mortgages.

The appetite is huge among companies like Kondaur, hedge funds and investors to buy shaky mortgages, credit-card debts, auto loans and even payday loans from lenders eager to cut their losses. So far this year, nearly $10 billion in troubled mortgages has changed hands, according to Private National Mortgage Acceptance Co., or PennyMac, a mortgage-loan buyer started in 2008.

Such loans often sell for just pennies on the dollar, with the buyers hoping to make a profit by restructuring the loan, selling it to someone else or, in the case of mortgages, foreclosing if all else fails.

But some borrowers complain that consumer-debt buyers have strong-armed them with threats, tried to collect the wrong amount or sought money from the wrong person. The Federal Trade Commission is examining nine large buyers of credit-card and other unsecured debts to determine their role in questionable debt-collection practices.

Kondaur and some of its competitors have deep roots in the subprime industry and, as was the case with subprime lenders, the company's operations fall under a hodgepodge of regulators, making it hard to enforce one set of standards.

As a result, some state officials say they aren't sure whether home-loan buyers should be regulated as mortgage companies or debt collectors, making it harder to effectively monitor the growing industry's behavior. "I have concerns that some of these activities fall through the cracks of the regulatory structure," says Mark Pearce, North Carolina's chief deputy banking commissioner.

Industry executives say they are working hard to meet all government requirements. "We take this compliance very seriously and realize that behind each of our loans is a borrower who is counting on us to act in the highest ethical manner," says David Spector, PennyMac's chief investment officer.

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