Waterloo, Iowa’s sixth-largest city, is a blue-collar community located off Interstate 380, the “Avenue of the Saints” that runs from St. Louis to St. Paul, Minn. Go a few blocks from the Crossroads Mall in west Waterloo, 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 employees in Iowa 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 radiates a Midwestern work ethic and an 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.”
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 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 in mortgages that it 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 mortgage borrowers that they work with will 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 for the federal government. 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 business — adopt regulations forbidding or limiting it.
But none of the social questions — outsourcing of jobs, treatment of troubled customers, moving profits (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,” says Stephen Lubben, a 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 to them, and pay borrowers’ real estate taxes and homeowners’ insurance bills. These days, servicers also spend lots of time and effort working with people unable (or unwilling) to make their mortgage payments.
In return, servicers typically get an annual fee of about three-eighths of 1 percent 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 business — are paring down their portfolios. This is leading to the rise of nonbank 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, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Lehman Brothers and Bank of America.
Based on our reading of Ocwen’s numbers, it has moved almost every American job in the portfolios it has 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 such as Waterloo.
In addition to having cheap labor, Ocwen’s servicing subsidiary also has low taxes. It recently moved the 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 will get 90 percent of its U.S. corporate taxes forgiven, thanks to the benefits of the special tax zone.
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.
The other known bidder for the ResCap rights is Nationstar Mortgage, controlled by the Fortress Investment Group. As a publicly traded private equity house, Fortress is taxophobic in its own business — but Nationstar is sending ever-larger checks to the U.S. 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 of its employees are in the United States, and that it’s a “high-touch” servicer. “High-touch” is marketing-speak 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 bid by at least the $20 million breakup fee Nationstar gets if another buyer prevails. Nationstar would keep ResCap servicing in the United States, although it would probably cut some of the jobs, based on its history.
(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. Berkshire Hathaway is also a major shareholder in The Washington Post Co.)
Ocwen has a less-than-wonderful relationship with Fannie Mae, which is the biggest player in the mortgage business 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 United States and has a good relationship with Fannie. Green Tree has apparently combined with Ocwen to bid jointly on the portfolio, according to people familiar with the maneuverings. If they have 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.
Fortune magazine staffer Erika Fry contributed from Waterloo, Iowa.