When Bank of America announced last week that it would begin cutting loan balances for distressed mortgage borrowers, it marked a sea change in the way lenders deal with seriously delinquent loans.

Until now, big lenders and servicers, such as BofA (BAC, Fortune 500), have only given principal reductions to a microscopic number of borrowers -- and only then as a last resort.

But they're now having to play catch up to a new kind of mortgage servicer -- a so-called "specialty servicer" -- that is seeing success in avoiding foreclosures. They handle the worst-of-the-worst, loans at least 90 days late, and they commonly offer principal reductions.

Of course, few mortgages end up in the hands of these servicers, and whether yours lands with one is really just the luck of the draw. But more loans are going 90 days late, and so business is booming.

In fact, last week the Federal Deposit Insurance Corp. sold specialty servicer RoundPoint a 50% stake in a portfolio of mostly non-performing mortgage worth almost $500 million.

"We expect them to work the loans to maximize the outcome," said David Barr, a spokesman for the FDIC. "This allows us to recap some of the upside [when the loans start to perform again."

And this could be just the beginning: "We expect many more deals like this in the future," he added.
What are servicers?

Unlike the person who owns your mortgage, either the bank (rarely) or a group of investors (more common), mortgage servicers are the companies that handle the day-to-day administration of mortgages. They collect payments, maintain escrow accounts and confront borrowers about late payments. They also initiate the foreclosure process when borrowers default.

Most servicer operations were set up in better times, when nearly everyone paid their loans regularly. But when the foreclosure crisis hit, they had to scramble to keep up with the added workload of managing non-performing loans.
Can't make your mortgage? Get an emergency loan

As a result, dozens of specialty services have sprung up to take on these difficult jobs. They mostly deal with loans three payments or more late, which is about 5% of all mortgages, according to the Mortgage Bankers Association.

"Some lenders are so large they can't handle delinquencies efficiently," said Rick Smith, CEO of Marix, a specialty servicers. "They're reaching out to [firms] that specialize in non-performing loans."

Plus, he added, companies don't want to staff up for what is hopefully a temporary problem. "If you hire 500 people to handle it and then the economy improves, then you're overstaffed by 500," Smith said.
Why can they cut principal?

Sometimes investors purchase whole portfolios of bad loans. These hedge funds and other groups don't service the loans themselves and their chief aim is to get the mortgages to pay off again. So they hire one of the specialty serving firms and give them a lot of leeway to get the loans back on track.

"We take a different approach to servicing," said Shaun Ahmad, CEO of RoundPoint Financial Group, a North Carolina-based firm. "We come up with better solutions.

One of their main solutions is cutting the principal balance so that homeowners no longer owe more than their houses are worth.

"Our clients would rather do a principal-reduction than an interest-reduction workout," said Gagan Sharma, CEO of BSI Financial. "Many bought the loans at discount so they're happy to pass the savings down to consumers."

This encourages people to keep paying loans rather than walking away. If property values increase, the owners can turn a profit when they sell.

Conventional servicers have been loathe to cut principal because the investors who actually own the loans don't want to accept immediate losses and lenders don't want to encourage more people to press for reductions.

In fact, less than 2% of trial loan modifications under President Obama's foreclosure-prevention plan, Home Affordable Modification Program, have cut the balance owned.
Loan balance cut in half

Joaquin Guzmann bought his Long Beach, Calif., house 23 years ago for $137,000 but has since struggled financially.

He moonlighted from his ground-servicing job with Continental Airlines and took out second mortgages and cash-out refinancings. By last year, his mortgage had ballooned to more than $518,000, counting late fees.

"I fell behind," he said. "I tried to reduce my payments but nobody was listening to me."

He got luck in the loan-servicing lottery when RoundPoint took over his account. The servicer combined his first mortgage with his home equity loan and lowered the total balance by 44% to $28,000. The servicer also lopped a point off his rate, lowering his monthly payment to $1,570.

It doesn't always work out so smoothly, however, because borrowers are hesitant to return phone calls or answer letters; sometimes they think the servicers are a scam.

"We have a hard time getting people to respond," said Vicki Lester, president of Mortgage Servicing at RoundPoint. "Borrowers are still in denial."

To get to people they start with a call campaign and then they mail out welcome letters and information packets. "Where all else fails, we send out people to knock on doors," Lester said.

So, the servicers remind, if you're lucky enough to win the modification lottery, please answer the phone. Talking to someone could mean cutting your loan balance and saving your home.
You make money on a short sale?

Not every home can be saved and specialty servicers employ strategies other than principal reduction. For example, short sales -- often with a twist.

Larry Casanova, a New Jersey truck and snow-plow driver, bought a house in Cherry Hill in early 2008.

"I've been a carpenter most of my life and I bought the house to renovate and flip, but the market turned around," he said. "I tried to sell but I wasn't even getting nibbles."

His loan had grown to $285,000 by the time RoundPoint got it. The company preferred doing a short sale, since the home was not Casanova's primary residence and he was looking to sell anyway.

RoundPoint has a short-sale program in which it pays borrowers a percentage of any price they sell the house for over a "quick sale value."

If they determine that a normal market value for a house is $200,000 but to sell it quickly the price would have to be $180,000, they give the borrower three months to sell the house for whatever he or she can get.

The servicers share with the borrowers anything they over the quick sale price. Borrowers may keep 30%, even 40%, of the overage.

Casanova only emerged with a few hundred in cash, but it was still more than he ever expected. And the nightmare of being unable to afford his home is over. To top of page

Name any major U.S. company, and chances are good it runs an office in Washington. They're all here to lobby, yes, but more specifically, they're watching the Hill, the White House, and regulators for any policymaking that could affect their businesses. In a new regular feature, Fortune.com will introduce you to one of these offices. We'll talk to the head lobbyist for that company and find out what policies they're pushing the hardest in Washington. We'll also talk to industry groups to see what's on their radar.

Best Buy's focus on Washington is relatively new. The electronics chain retailer didn't have a government relations department until eight years ago. And only a few months ago did Best Buy (BBY, Fortune 500) hire its first in-house lobbyist based solely in Washington. (Before, the company's policy experts were shuttling between the company's Minneapolis headquarters and the capital.) Given the number of issues affecting it, the retailer decided it was time to be in Washington on a daily basis.


Paula Prahl, Best Buy's senior vice president of communications, public affairs and corporate responsibility, is responsible for briefing CEO Brian Dunn and the company's board of directors on public policy priorities.

On Washington issues, she works closely with Laura Bishop, who was hired in 1993 to build a government relations department, and Parker Brugge, Best Buy's new government relations director in DC. The company also works with a team of consultants. Prahl talked with Fortune.com about what's most important to Best Buy in Washington right now.

Broadband Access

More users connected to the Internet means more customers for Best Buy. "We see ourselves as a ubiquitous brand offering of all sorts of things that let people connect to broadband," says Prahl.

It's no surprise then that the company supports the National Broad Plan recently unveiled by the Federal Communications Commission. In particular Best Buy likes the FCC's goal of bringing fast Internet to underserved parts of the country.

The company also sees a chance here to work closely with the FCC to implement the policy, which the company has done in the past. During the digital television transition, the FCC contracted Best Buy's Geek Squad to provide free service in 31 states for people who needed help making the conversion. Prahl sees similar chances to collaborate on the National Broadband Plan.


Recycling

Right now 20 states have laws governing electronics retailing, and they're all different. Following all these rules gets confusing for Best Buy, which runs recycling programs in all 50 states. The solution, says Prahl, is a federal bill that would bring some uniformity to the system.

Prahl says legislation is necessary to achieve widespread electronics recycling, since the cost of collecting an item, transporting it, and breaking it apart often exceeds how much a company can get selling its parts. A refrigerator often pays for itself because it's easier to disassemble and the steel from its body has value on the market.

But electronics can be another story. A laptop, for instance, requires far more labor to pull apart. The federal government could encourage manufacturers to design their products to make recycling easier down the road.

No bill related to electronics recycling has been introduced yet during this Congress, although there has been interest in past years in both the House and Senate.

Sales Taxes

Best Buy currently faces a disadvantage against online retailers that don't collect sales taxes. According to the current rules as long as a retailer doesn't have a physical presence in the state where a customer's shopping, the company doesn't charge a sales tax on the final bill. Amazon.com (AMZN, Fortune 500) customers, except in a few states, know this fact well. In theory, the shopper is supposed to file a state income tax. (Of course people rarely do this.)

Brick and mortar retailers like Best Buy want to close this loophole, and together with state legislators and some small businesses, they've banded together to form a group called the Main Street Fairness Initiative.

Prahl says the issue is even more significant now given how many states are struggling fiscally. Sen. Mike Enzi, R-Wyo., and Rep. William Delahunt, D-Mass., have expressed interest in taxing e-tailers, but no bill has been introduced in either the House or Senate yet. To top of page

In the energy business, Jim Rogers is an anomaly. His company, Duke Energy, relies heavily on coal, a rock that accounts for 45% of America's energy use. Yet Rogers is also an environmentalist and a believer in renewables.

To date, Rogers and Duke Energy (DUK, Fortune 500) has invested over $1 billion in wind technology, participated in the Copenhagen Climate Conference, and partnered with companies in China, which includes an agreement with ENN Group to build large-scale solar power plants in North Carolina.



He's also a believer in "clean coal," the idea that carbon dioxide can be segregated from coal and pumped deep beneath the earth. Duke is investing in a coal gasification plant in Indiana to prove the technology. If it works, it might help the environment, but it won't do much to stop coal's rough record. Though 2009 saw a record low of 18 coal-mining fatalities, the industry has been plagued for years with questions over safety practices. With at least 25 dead in Monday's accident in Montcoal, W.Va, and President Obama's emphasis on clean coal as a bridge to renewable energy, those questions will surface once again.

We spoke with Rogers on March 31, a week before the Massey Energy (MEE) coal mine explosion. Massey counts Duke among its customers and Duke declined to comment about the disaster. But there is little doubt that Rogers is closely watching what's happening in West Virginia. Here's what he had to say about why he still supports the black rock, about Europe's "climate fatigue," and about retirement (for his plants, at least).

Though Duke currently relies heavily on coal, you're a cap-and-trade supporter. What's a coal guy doing supporting the strict enforcement of carbon emissions?

The reason I'm an advocate for cap and trade, and for addressing the other pollutants from coal plants, is that my job is to provide solutions. Also, I think there's the recognition that by 2050, every power plant I -- or we -- own today or operate will eventually be retired or replaced, with probably the exception of our hydro facilities. So, if we're going to have to retire a place anyway, I'd like a clear roadmap with respect to carbon, coal, and nuclear.

The fact of the matter of is, every technology we use today each has its strengths and shortcomings, whether it's nuclear, coal, gas, or renewables, when you look at them against the criteria of affordable, reliable, and clean.

Until recently, China was an easy fall guy for energy and climate issues. But that tune has clearly changed. Case in point: Duke Energy has paired up with three companies in China. So you obviously see a lot of growth potential there.

China has an economic imperative to build power infrastructure. They build a coal plant every other week. They have 14 nuclear plants under construction, more than any other country in the world. They lead the world in solar panel and wind-turbine production. They are working hard on battery technology for cars and grid-quality battery technology.

My mission is affordable, reliable, clean, and so my mission is to have a nuanced relationship with the Chinese. We're sophisticated enough to recognize that we're going to be competing and cooperating on things. In the energy areas, specifically in power production, they could help us as we rebuild our infrastructure to rebuild it in a way that makes it more affordable to our customers.

My bet is it will take us a decade in this country given the environmental impediments and just the inability to make things happen in a real time. They will know the answer as to whether this is a viable commercial alternative. It has a profound implication in terms of the role of coal in the future. I'd rather learn that in five years than 10 to 15 years. So by tuning into their work, it gives us the ability to make a smart decision about what to build sooner.


Today, you have over a billion dollars invested in wind. I'm wondering if you can elaborate on your progress and still-untapped potential with that tech.

We're the 10th largest developer. Three years ago, we had no wind. It's a good business to be in. ... I think that wind investment is one part of a renewable build-out strategy that we have. We're ahead on it. We've done it for years.

Recently, you mentioned you'd observed European countries experiencing what you called, "climate fatigue." Talk more about that.

Two things are happening: I see that the mechanism that European countries have used to drive renewables have reached an interesting point, translating into higher prices for consumers, residential, and commercial, notwithstanding the tax subsidies which translates to higher taxes. As a result, you're starting to see some pushback.

Both Germany and Spain have adopted hidden tariffs, and they are dramatically dropping price pay, and that is really slowing down the investment in solar. The other important thing is Germany is experiencing difficulty at night because they built so much wind that they're having to recycle some of their coal plants, which are much cheaper, and there's even been times when they've had to reduce the production from nuclear.

We're the third-largest nuclear operator in the country, and let me tell you, when you turn those puppies on and you run them, the last thing you want do is turn them down because it's safer, reliable, and less costly to just run them all out 24/7.

So what do you see as a solution to that?

I think the real answer will be -- and I say this with total humility -- from a U.S. and China perspective. The two largest emitters, this developing country and the largest developed country, should find a way to work together to accelerate technology to really reduce the carbon footprint and do it in a way that's fair to both countries. Because if people see those countries in action, I think the rest of them will sign up.

Now remember, I say that with humility because at the end of the day, this is going to require the consensus of many countries, and I don't think the G2 coming together and dictating to the rest of the world is enough.

We've talked about your immediate plans. Where do you see the industry going in the next 10 years or so?

I think this is the most transformative period since the era of Edison, Westinghouse, and Tesla. Our mission was to provide universal access in America with electricity. We did it. In fact the National Academy of Engineers says that was our greatest achievement, more than going to the moon, more than the Internet, more than all those.

That's certainly a bold statement to make.

Recently, I read somewhere something that stuck with me. "Every day, I wake up wondering what I'm dead wrong about." I looked at this strategy, and I looked at this dual mission, and I said to myself, if the report from the Intergovernmental Panel on Climate Change was wrong and carbon wasn't a problem, would I change my mission? Would I change my vision? Would I change what I'm doing today?

The answer is of course, no, I wouldn't change a thing because we're going to have to modernize our fleet and for energy efficiency anyway. There are 1.6 billion people today, five times the United States population or more, without electricity, without access to the modern world today. Between now and 2050, we're going to go from 6.5 to 9 billion people, and they're going to want more electricity.

So the battle over scarce resources to generate electricity and building power plants is going to be tremendous. I'm 62-years-old, and a year ago, I signed up for five more years as CEO, because I want to be here when this happens. I want to be a part of shaping that dual mission of modernization and de-carbonization of our fleet and making our communities the most energy-efficient in the world.