Wall Street Finds Profits by Reducing Mortgages

Fortress, which declined to comment, typically buys batches of loans and works with other companies to evaluate which ones might qualify for F.H.A., Fannie Mae or Freddie Mac refinancing.

Sometimes Fortress works with Nationstar, a mortgage servicer and originator that it owns. Other times, Fortress uses an outside partner like Meridias Capital, a lender in Henderson, Nev., that once originated Alt-A loans, which are just above subprime.

After the mortgage market imploded, Meridias began dissecting portfolios of troubled loans for investment funds.

Because firms like Fortress purchase blocks of mortgages at distressed prices, they are able to reduce the principal amount of the loans. Nick Florez, president of Meridias, calls such transactions an “incentive refinance.” He said he would not agree to take a loan unless he could help the homeowner. He said he was able to reduce the loan amount by 11 percent on average.

“I’m giving money away,” said Mr. Florez, who is a 35-year-old Las Vegas native. “It’s really a feel-good business.”

It is too early to know how the new loans will work.

David H. Stevens, the new commissioner of the F.H.A., said he was monitoring F.H.A. lenders but did not have thorough information about which ones work with distressed investors. So far he has not seen a problem from loans coming from hedge funds.

“They’re helping to protect people in their homes and they’re refinancing people from a distressed situation,” he said.

But he acknowledged that funds have an incentive to aggressively push homeowners into federally guaranteed loans, since the investors get their money back as soon as they complete the refinancing.

Seth Wheeler, a senior adviser in the Treasury Department who specializes in housing policy, declined to say whether the investment firms that are lowering principal for homeowners are altruistic or not.

“Investors are doing it where it both benefits the investor and the borrower,” he said.

Part of the risk may be determined by how the funds compensate the F.H.A. lenders and whether the lenders are beholden to the funds for business.

David Zitting, the chief executive of Primary Residential Mortgage, the company that refinanced the Alva family’s loan, said his company did not receive fees from the hedge funds.

“They have all sorts of motivations that, frankly, we don’t understand,” he said. “We don’t do anything special for them because that’s not fair lending.”

The Alvas had to dip into their savings to qualify for their new federally insured loan, since the biggest F.H.A. mortgage they could get was for $285,000, they said. They paid off $21,000 in credit-card and car loans, and put up an additional $29,000 for their new mortgage, depleting their already meager savings.

Brian Chappelle, a mortgage consultant, said loans to people like the Alvas, with modest incomes and scant savings, could turn out to be risky.

“It does raise risk concerns for F.H.A.,” he said.

The Alvas are grateful for the help. Their home is, Marisela said, a dream come true. “I’m very happy,” she said. “We never thought this was possible.”