Yale’s cap­i­tal­ism and al­tru­ism col­lide

▶▶Yale’s en­dow­ment has a big stake in pri­vate eq­uity, where it has less say in how its money is used ▶▶“Lim­ited part­ners are pas­sive, and they need to be pas­sive”

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A photo of Frank Dou­glass’s Vic­to­rian house is dis­played on a web­site about Yale’s em­ployee home­buyer pro­gram. But Dou­glass, a cus­to­dian who’s worked for the school for 27 years, has fallen be­hind on mort­gage pay­ments af­ter carpal tun­nel syn­drome and a knee in­jury side­lined him from work. Now he’s fac­ing fore­clo­sure by a com­pany in which Yale’s en­dow­ment is an in­di­rect in­vestor.

The Yale port­fo­lio holds pri­vate eq­uity funds man­aged by Fortress In­vest­ment Group, which owns more than 60 per­cent of Na­tion­star Mort­gage Hold­ings, the ser­vicer in charge of col­lect­ing pay­ments on Dou­glass’s mort­gage. “Yale helped me buy my house, and now they’re in­vest­ing in the com­pany that’s try­ing to take my house from me,” says Dou­glass, who serves on the board of alders, New Haven’s city council. Dou­glass’s case is in me­di­a­tion, with a fore­clo­sure mo­tion pend­ing. A cour­tap­pointed me­di­a­tor said last year that Na­tion­star hadn’t fol­lowed guide­lines when it de­nied him a loan mod­i­fi­ca­tion.

An­other Yale in­vest­ment, a hedge fund steered by Kingstown Cap­i­tal Management, has a stake in the mort­gage ser­vicer Ocwen Fi­nan­cial. Both Na­tion­star and Ocwen have been in­ves­ti­gated for un­fair prac­tices and or­dered to pro­vide re­lief to some home­own­ers. While much of the coun­try has moved be­yond the fore­clo­sure cri­sis, it’s still a big is­sue in New Haven, the city dom­i­nated by the univer­sity. Crit­ics are ask­ing how the en­dow­ment’s in­vest­ments fit in with the school’s ef­forts to pro­mote home­own­er­ship. “Yale can do the right thing and ex­ert in­flu­ence over their man­agers and change the way they do busi­ness,” says Aaron Green­berg, the head of a Yale grad­u­ate stu­dent union, and an­other mem­ber of the city’s board of alders. Green­berg helped dig up the con­nec­tion be­tween the en­dow­ment and the ser­vicers. The board of alders hasn’t taken ac­tion, but mem­bers of its black and His­panic cau­cus are look­ing into the role of ser­vicers in fore­clo­sures and the univer­sity’s po­si­tion as an in­vestor. “Yale is an eth­i­cal in­vestor and was a pi­o­neer” in weigh­ing fac­tors be­yond economic re­turn, says Tom Con­roy, a univer­sity spokesman, who wouldn’t com­ment on spe­cific in­vest­ments. Dur­ing the apartheid era, it di­vested from 17 com­pa­nies do­ing busi­ness with South Africa. “Yale ap­plies its eth­i­cal in­vest­ment policy to public and pri­vate po­si­tions alike,” Con­roy says. Be­yond the ques­tion of whether to put money into spe­cific in­dus­tries, the in­vest­ments high­light

an­other is­sue. More than half of the univer­sity’s $25.6 bil­lion en­dow­ment is in­vested in pri­vate eq­uity, hedge funds, and other illiq­uid as­sets. That can make it harder for the school to con­trol where its dol­lars go.

Hedge funds can lock in­vestors into hold­ing them for up to three years. With pri­vate eq­uity, in­vestors buy into funds as lim­ited part­ners and re­lin­quish a say in in­vest­ment de­ci­sions. If lim­ited part­ners want to exit the fund, they have to get per­mis­sion—and they may suf­fer a fi­nan­cial penalty. “Lim­ited part­ners are pas­sive, and they need to be pas­sive,” says Michael Wolitzer, a part­ner at law firm Simp­son Thacher & Bartlett. There are ex­cep­tions in which large in­vestors have ex­erted in­flu­ence, Wolitzer says, but they’re rare.

Yale’s en­dow­ment, the na­tion’s se­cond-largest af­ter Har­vard’s, has ap­pealed to out­side man­agers to avoid in­vest­ments in com­pa­nies that don’t re­duce green­house gas emis­sions, re­sult­ing in one fund sell­ing stakes in oil sands pro­duc­ers and an­other drop­ping shares in a coal com­pany, the univer­sity said in April.

Un­der Chief In­vest­ment Of­fi­cer David Swensen, Yale’s en­dow­ment was among the first to shift its as­sets into pri­vate eq­uity and hedge funds. Over 20 years, pri­vate eq­uity earned the en­dow­ment an an­nu­al­ized re­turn of 36 per­cent, the school said in a 2014 re­port.

Yale was an in­vestor in a Fortress fund as of late April, ac­cord­ing to a re­port by re­search firm Pre­qin seen by Bloomberg. A 2013 Fortress pre­sen­ta­tion showed Na­tion­star as a key hold­ing in that fund. Yale had $216 mil­lion with Kingstown, the hedge fund, as of June 2015 through a lim­ited part­ner­ship called Ktown, which ap­pears on a univer­sity tax fil­ing. Ktown, which is 97 per­cent owned by Yale, holds al­most 2 per­cent of Ocwen’s shares, ac­cord­ing to fil­ings. Kingstown de­clined to com­ment.

The U.S. Con­sumer Fi­nan­cial Pro­tec­tion Bureau and 49 states ac­cused Ocwen in 2013 of en­gag­ing in “sig­nif­i­cant and sys­temic mis­con­duct.” Ocwen agreed to pro­vide $2.1 bil­lion in home­owner re­lief to settle the mat­ter. John Lo­vallo, an Ocwen spokesman, says the com­pany is com­mit­ted to find­ing ways to keep peo­ple in their homes and has helped more than 625,000 fam­i­lies avoid fore­clo­sure.

Na­tion­star agreed to make re­funds of about $16.2 mil­lion to bor­row­ers re­lated to de­lays in ap­prov­ing mod­i­fi­ca­tions trans­ferred from prior ser­vicers, the com­pany said in a May regulatory fil­ing. New York’s Department of Fi­nan­cial Ser­vices re­quested in­for­ma­tion in 2014 about Na­tion­star’s per­for­mance and staffing af­ter re­ceiv­ing hun­dreds of com­plaints about mod­i­fi­ca­tions, im­proper fees, and lost pa­per­work. The agency says it’s still ex­am­in­ing the mat­ter.

Na­tion­star says it’s helped 600,000 bor­row­ers with mod­i­fi­ca­tions, re­pay­ment plans, and other so­lu­tions since 2010. “The ser­vic­ing books we have ac­quired from banks have seen a 50 per­cent im­prove­ment in delin­quency rate,” said Chief Executive Of­fi­cer Jay Bray in a state­ment. Government-backed Fan­nie

Mae, which buys mort­gages, gave Na­tion­star its high­est rat­ing for mort­gage ser­vicers last year.

Na­tion­star re­jected Dou­glass’s ap­pli­ca­tion for a mort­gage mod­i­fi­ca­tion on the grounds that it would re­sult in a higher monthly pay­ment. But Sarah White, an at­tor­ney with the Con­necti­cut Fair Hous­ing Cen­ter, who’s ad­vis­ing Dou­glass, ar­gues that the ser­vicer didn’t fol­low Fed­eral Hous­ing Ad­min­is­tra­tion guide­lines. Howard Kane, a cour­tap­pointed me­di­a­tor, wrote in Au­gust that Na­tion­star’s mod­i­fi­ca­tion pack­age was miss­ing pages and con­tained forms not re­quired by the FHA.

Dou­glass is one of more than 1,100 Yale em­ploy­ees who’ve re­ceived home­buyer as­sis­tance. He got about $20,000 in tax­able grants over a decade. Yale also of­fers free fi­nan­cial coun­sel­ing for em­ploy­ees, says Con­roy, the univer­sity spokesman. “I love the place,” Dou­glass says of his house on Elm Street. “I don’t want to leave it.”

Dou­glass hopes to stay

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