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”
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.”
The bottom line Yale’s endowment investments are made increasingly through private equity, which may be hard to untangle when ethical questions arise.
Douglass hopes to stay