11/18/2011

Barclays-Linked Mortgage Servicer In Play

A firm that formed in 2009 to manage Barclays’ devalued credit-product holdings is trying to figure out what to do with its home-loan servicing business.

C12 Capital has looked into a number of options for its DHM Mortgage Servicing unit in the last few weeks, including buying a whole-loan investment shop that could feed new business to the operation. But when that idea proved too costly and complex, C12 shifted its focus to selling a stake in the business.

The search for a partner is led by C12 executive Darryl Herrick. His targets have included shops that specialize in buying and rehabilitating nonperforming mortgages, often with securitization as an exit strategy.

Along with DHM’s operations, the new partner would take on principal James Dooley and a few other staffers. Indications are that C12 would retain an interest in DHM under the arrangement, with the new backer likely managing the servicer.

DHM formed in 2010, largely to service whole loans in the Barclays book. C12’s search for a partner in part reflects a desire to determine a direction for DHM before its current $1.1 billion servicing portfolio runs off in about five years. Meanwhile, the idea of channeling business to DHM through the acquisition of a loan buyer didn’t fly in part because C12 expects whole-loan trading volume to dwindle.

Before DHM formed, Dooley oversaw contracts with outside servicers that C12 hired to work on its loans. But he still was performing the bulk of C12’s servicing-related due-diligence work, leading the shop to conclude that it would be more cost-effective to bring all servicing duties in-house. Ultimately, the work proved highly labor-intensive, with no guarantee of profitable fee income.

Sources said C12 at one point sought additional clients for DHM, but didn’t get far with the campaign. DHM is licensed to service loans in several states.

C12’s initial mission was to set up and run a hedge fund called Protium Finance whose sole assets consisted of the Barclays book, which along with whole loans includes devalued asset-backed securities, mortgage bonds and a mix of other structured products with exposures to troubled bond insurers. That arrangement ended earlier this year, when Barclays responded to business limitations imposed by the Dodd Frank Act’s Volcker Rule by pulling the holdings — totaling $12.5 billion — and retiring a $12.6 billion loan that helped finance the fund’s creation two years earlier.

In addition to Protium Finance, C12 runs a $900 million vehicle called Helix Liquid Opportunities Fund whose holdings encompass corporate debt, commercial mortgage bonds and currencies. That vehicle is backed by outside investors and C12 executives.

C12 is led by founders Michael Keenly and Stephen King. Keenly previously was a member of Barclays’ structured-product team. King was in charge of the bank’s principal mortgage-trading desk. Dooley also came from Barclays, where he led whole-loan portfolio management. He had joined the bank in June 2008, following stints trading distressed mortgages at Countrywide and Washington Mutual.