International Mortgage News

Comptroller of the Currency John Dugan said regulators worldwide should prohibit lenders from making payment-option adjustable-rate mortgages and other negative amortizing products. "We should generally prohibit the lowering of monthly payments through so-called negative amortization mortgages, which have performed terribly," Mr. Dugan told an international banking conference in Tokyo. The U.S. national bank supervisor urged regulators to adopt minimum mortgage standards that require verification of borrowers' income and assets, meaningful downpayments and underwriting that takes into account the fully indexed interest rate. The comptroller noted that real estate markets around the world are heating up due to low interest rates and they should be careful. "We in America fundamentally lost our way" and the consequences have been "disastrous," Mr. Dugan said. "It's simply hard to believe how far and how fast mortgage originators strayed from basic, fundamental, common-sense principles of sound underwriting. And perhaps it's even more astounding that lenders, investors and yes, regulators, allowed this to happen," he added. In the U.S., few, if any, are still originating these types of mortgages.

Preliminary regional distribution information on a new $3 billion two-year global security priced by the Federal Home Loan Banks shows the bulk of the deal going to U.S. investors but also some interest on the part of Asian buyers. The distribution for the deal, CUSIP 3133XVRS2, was as follows: 71% U.S. buyers, 19% Asian buyers and 9% "other" buyers. The following is the preliminary information on the type of investor in the deal: investment advisors/fund managers, 61%; central banks, 19%; financial institutions, 7%; insurance/pension funds, 5%; state/local government, 5%; and other/unknown, 3%. The deal is slated to settle Nov. 16, mature Dec. 28, 2011 and make interest payments every June 28 and Dec. 28 starting this December.

The seasonally adjusted annual rate of single-family housing starts in Canada softened slightly in the latest month but the volatile multifamily segment surged. "Despite a small decline in single-home starts in October, the level of single-home starts remains at its second highest level since October 2008," said Bob Dugan, chief economist, Canada Mortgage and Housing Corp. In total, the seasonally adjusted annual rate of single-family and multifamily starts combined was 157,300 during the month, up from 149,300 the previous month, according to CMHC.

The revaluation of an option to acquire the equity of a Swiss National Bank fund UBS sold its mortgage-related problem assets into contributed a small gain to the company during the quarter, but overall it suffered a loss during the period due to other accounting charges. The SNB StabFund revaluation contributed gains of 168 million Swiss francs ($165 million) to UBS in the third quarter, but as a whole UBS took a net loss of 564 million Swiss francs ($554 million). The company said the accounting charges that caused the loss stemmed from tightening in its own credit spreads, a net loss related to a cross-border acquisition and related currency differences, and the conversion of certain mandatory convertible notes.

Employment and business woes in Europe, the Middle East and Africa are continuing to erode the performance of commercial mortgage-backed securities and multifamily transactions in the region even though property values appear to have bottomed out and shown slight improvement, according to a report from Moody's Investors Service's London office. Christian Aufsatz, a Moody's senior vice president and co-author of the report said the rating agency remains skeptical of a recovery and forecasts declines in value "until 2010 in all EMEA CMBS markets." Viola Karoly, a Moody's analyst and co-author of the report, said overall performance deterioration that started in 2008 has so far "continued unabated."

Canada Mortgage and Housing Corp.'s forecast for expected annual Canadian housing starts is more optimistic than it was at the beginning of the third quarter when it comes to 2010, but its outlook for this year remains the same, as CMHC said starts are expected to reach 164,900 by the end of next year, up from its early September estimate of 150,300. The expected total for this year remains at 141,900. "We expect housing markets across Canada to strengthen leading into 2010 as economic conditions improve," said Bob Dugan, CMHC's chief economist. "Demand for existing homes has rebounded since the beginning of the year. In addition, lower inventory levels characterize both the new and existing home sales markets." However, "the strong pace of multiple listing service sales seen in the second and third quarters of this year reflects, in part, activity that was delayed the previous two quarters and is not likely to be sustained," CMHC said.

Troubled assets that are partially real estate-related continued to affect Deutsche Bank AG to some extent in the third quarter but the company as a whole was nevertheless extremely profitable during the period. Deutsche Bank's problem loans increased slightly to 8.7 billion euros ($12.9 billion) in the quarter. Standard & Poor's analysts said the company's losses from erosion in commercial real estate loans and other problem assets are expected to persist into 2011. They left Deutsche Bank's ratings unchanged after reviewing its earnings for the period. Deutsche Bank generated 1.4 billion euros ($2.1 billion) in net income in the third quarter. This was roughly three times the 414 million euros ($615 million) in net income the company generated during the third quarter of last year. The gain in net income largely stemmed from tax benefits.

The European Commission has given the go-ahead to state aid for Northern Rock that the troubled United Kingdom lender said it needs to restructure and be an active player in the U.K. mortgage market. The company hopes to complete restructuring by year-end that would separate it into two entities. One of these would be a new savings and mortgage bank called Northern Rock PLC that would hold some existing mortgage accounts and all savings accounts. The other would be a company called Northern Rock (Asset Management) PLC that would hold and service the balance of the company's existing residential mortgage book. This company would, subject to approval by the U.K.'s Financial Services Authority, be regulated as a mortgage provider rather than a deposit-taking bank. It would not do any new lending, nor would it be considered a "bad bank" since 90% of its loans would be performing assets, according to Northern Rock. The state aid would be received after the restructuring. While the company plans an increase in its level of new mortgage lending it says this will be limited to £4 billion pounds this year, £9 billion in 2010 and £8 billion in 2011. (At the time of this writing the pound-to-dollar exchange rate was such that £9 billion, for example, would be worth about $14.8 billion.)

Moody's Investors Service is divulging some of the criteria in its originator assessments, which are used in conjunction with rating residential mortgage-backed securities transactions in Europe, the Middle East and Asia. Moody's said it primarily is focusing on each originator's origination, underwriting and closing practices and whether they are in line with good loan quality, as well as whether the originator is acting within its stated risk/reward strategy. Shivani Kak, a Moody's assistant vice president, further noted that the OAs focus only "on the originator's policies and practices on the loan performance as opposed to other factors such as the macro-economic environment and servicer performance."

The Dutch central bank, De Nederlandsche Bank NV, has seized Dutch mortgage lender DSB Bank NV due to solvency concerns at the institution. The central bank said it was forced to step in after talks with a consortium of five banks that had considered stepping in to support the institution broke down. Banks were concerned about "uncertainty surrounding possible claims on DSB in relation to excessive loans and failures in fulfilling duty of care, as well as possible losses on issued loans," according to the central bank.