As published in
American Banker Magazine

June 22, 2006

[ American Banker 6-22-2006.pdf ]

C-Bass Founder Has

New Gig At Fortress

 By Marc Hochstein
 

Tony Ettinger, who in the 1990s helped start two specialists in distressed consumer loans, has joined the New York private equity firm Fortress Investment Group LLC as a managing director in charge of forming joint ventures.
 

As American Banker reported in
April, Mr. Ettinger had been hunting
private equity capital to build a servicer that would specialize in identifying borrowers in trouble and working out a modification or repayment plan forthem before they default.

In an interview Wednesday, he said he had received “a flurry of interest” in the idea, and the project may yet come to fruition. He is “trying to sort it through right now,” he said, and to figure out what makes sense for Fortress and how to deal fairly with the handful of employees at Credit-Based Capital, the Chappaqua, N.Y., firm he started in August of last year.
 

Mr. Ettinger, 49, said he got a phone call a couple of weeks ago from Peter L. Briger Jr., one of the principals at Fortress, who suggested that instead of “doing one deal for yourself, come here and do a bunch of them. He made it attractive, and the next day I joined.”

Fortress, which manages $21 billion
of investments, was part of the consortium that bought the manufactured housing finance operations of Conseco Inc. for $850 million in 2003. This year a Fortress-managed fund agreed to buy the Dallas home builder Centex Corp.’s nonprime lending unit for $575 million. The lender will be renamed Nationstar Mortgage LLC when the deal closes, which is expected to happen this summer.
 

In 1996, Mr. Ettinger founded C-Bass LLC with veterans of Citicorp Securities’mortgage trading desk. The bond insurer Enhance Financial Services Group Inc., where Mr. Ettinger was an executive vice
president, put up half the capital; the
Milwaukee mortgage insurer MGIC
Investment Corp. put up the other half. C-Bass, based in New York, buys and securitizes subprime and nonperforming loans and services them through its Houston unit Litton Loan Servicing LP

.
Two years later Mr. Ettinger set up
another New York joint venture
between Enhance and MGIC: Sherman Financial Group, which buys unsecured consumer debt such as charged-off credit card and Chapter 13 bankruptcy receivables. Radian Group Inc. of Philadelphia bought Enhance in 2001, and Mr. Ettinger retired.

In 2003 he joined Maple Financial
Group Inc., an $18 billion-asset company based in Toronto, where he ran thecommercial finance business.

He said the investments he works on
for Fortress will involve “a full array of assets that are attractive from a risk return perspective” — both consumer and commercial.

In Mr. Ettinger's view, services of mortgages and other consumer loans are ill prepared for the coming deterioration in credit quality; though lenders have invested heavily in analytical tools for originating loans and collecting on bad debt, they have not brought the same sophistication to servicing performing loans. "They haven't brought the rocket scientists on to the servicing side."

Technology could help firms predict which borrowers are headed for default, he said. For example, "most people pay in fairly regular patterns" - they tend to mail their checks around the same time each month. If they start paying later than normal, "there's usually a reason," and a servicer's systems could track such patterns and alert the company to deviations.

Gleaning such information is one thing; acting on it is another.

Kathleen Tillwitz, an analyst at Fitch Inc., said it is "awkward" for a servicer to contact a borrower in good stead on the basis of an updated credit report, let alone a predictive behavioral score.

People who are current on their loans typically "don't want to hear from their servicer," she said. "Not many servicers are going to make that call." But she agreed that more of them should.

Mr. Ettinger said his servicer would "need to be careful" about approaching borrowers who have not defaulted but have given it reason to believe they will do so. It would make a "courtesy call" in which it would say it noticed some changes in payment patterns and ask, "Is everything OK? … Is there anything we can do to help?"

The idea is that "the more contact you have with an at-risk borrower, the more chances they have to talk to you," he said.

He also made a more controversial assertion about servicers: Even when a troubled borrower takes the initiative of calling, as long as the loan is current, "they treat it like a prime loan and try to minimize contact with the borrower."

In his observation, the standard operating procedure is to simply tell these borrowers to do their best to pay. Only when the customer becomes delinquent a few months later is the typical servicer willing to counsel them or negotiate a modification or repayment plan, and by then there are fewer options for working out the loan, he said.

"The key … is to try to work with that borrower as soon as they have a problem, when they've got more flexibility and they still have money," Mr. Ettinger said.

But Ms. Tillwitz said that when borrowers call to warn of problems, most of the servicers that Fitch rates will research the situation and, if warranted, negotiate a repayment plan, a loan modification, or a home sale.

John LaRose, the chief executive of CompuLink Corp., the Lansing, Mich., subservicer that does business under the name CeLink, said that such a call "would cause us to go into a whole different level of communication." It would want to know "as much as … [the borrower] is willing to share."

For example, if the borrower were getting divorced, CeLink would try to learn things like the date the divorce is final and whether the spouse would assume the mortgage, he said.

Enhance acquired small servicers and contributed its interests to C-Bass and Sherman (to which it also contributed an analytics firm). Mr. Ettinger said the new servicer would also be built with small acquisitions. Servicing is "not a business line that lends itself" to starting from scratch.

Ratings are important, and the rating agencies look for a track record, he said.

Unlike in 1996, Mr. Ettinger does not have an insurance company with nearly $1 billion of assets behind him this time. Credit-Based Capital, the Chappaqua, N.Y., firm he started in August, is close to securing private equity capital for its first purchase, he said.

He is banking on the track record of his creations. Last year C-Bass and Sherman produced $147 million of profits for MGIC, 23% more than they did in 2004, and $136 million for Radian, or 20% more than they did in 2004, according to the insurers' annual reports.

Also, unlike C-Bass' Litton Loan Servicing LP and Sherman's Allegis Servicing, which service primarily loans owned by their respective parents, the new company would work for third parties.

However, Mr. Ettinger said it would share some of the credit risk by investing in the residual pieces, to show "we're putting our money where our mouth is."

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