The Omaha school board put a stop to a plan that would have doubled the amount of money the district's retirement system has in a fund that buys underwater mortgages.
Board members questioned the riskiness of investing retirement funds into distressed mortgages.
The Omaha School Employees' Retirement System already has $50 million invested with the 25 Capital Mortgage Opportunities Fund. It sought board approval to pump another $50 million into the fund last month.
25 Capital buys underperforming mortgages at a deep discount from banks and federal agencies such as the U.S. Department of Housing and Urban Development. It profits by helping foundering homeowners refinance their loans, or sell their houses at a short sale. 25 Capital is the third-largest buyer of government loans in the United States.
Michael Smith, the retirement system's executive director, said 25 Capital takes on the in-depth loan modification work that banks often won't do while turning a quick profit for investors.
“They have the wherewithal to stay in touch,” Smith said. “They know these programs inside and out to help folks get themselves out of the dilemma they're in.”
The OPS system invested the initial $50 million with 25 Capital about six months ago, Smith said. The retirement system board voted to invest more because the opportunity is fleeting: The number of underperforming mortgages is declining as the housing market rebounds from its recession-era slump.
The Wall Street Journal reported HUD planned to sell at least 40,000 underperforming loans this year. Pension funds such as the California Public Employees' Retirement System have invested more money in recent years into residential housing, including funds that buy foreclosed homes.
Mortgages in 25 Capital are spread across 44 states, but most originate in states such as New Jersey and Florida, where real estate markets remain unpredictable, OPS board member Matt Scanlan said.
“I wouldn't invest my own money that way because of where the mortgages were mainly concentrated, in some volatile housing markets,” Scanlan said.
Board member Lou Ann Goding said she had some initial reservations, but they were eased after a presentation that showed a quick turnaround on investment.
“There's a four-year payback,” she said. “The mortgages are redone and sold off and we get the money back.”
Four board members voted in favor of it, while Scanlan, Justin Wayne and Yolanda Williams voted against. Lacey Merica and Marque Snow abstained. Five “yes” votes were needed for approval.
Scanlan also questioned whether the school board should be in the business of approving investment opportunities. The retirement fund board OKs investments but then must forward them to the school board for approval.
“I'm not a financial adviser, nor do I think the board should be in that role,” he said.
Smith said in the wake of the board's decision, the retirement system would keep the $50 million in question in its other funds.
The fund, with 11,000 members, is valued at $1.2 billion, Smith said.
It is currently funded at 74 percent of its obligations, which translates to a shortfall of about $450 million.
“Obviously the higher the number, the better, but it's not in jeopardy,” Smith said. “There are no red lights flashing.”
By October, the fund had grown about 13 percent over the year, and an average of 8 percent over the past decade.