Servicing

Bank of America plans to sell $460 million of mortgage securities backed by commercial real estate loans without relying on a Treasury program to aid lending in that market. According to Bloomberg, the security is backed by mortgages on office and industrial properties in Florida. The bonds are split into four portions, the largest of which is $350 million of top-rated debt. Fortress Investment Group LLC is the sponsor of the transaction.

The House Financial Services Committee has approved an amendment that cuts a 10% risk retention requirement on sales and securitizations of mortgages down to 5%. Industry groups supported the amendment by Rep. Walt Minnick, D-Idaho, that was approved by a voice vote and attached to a regulatory reform bill. The Mortgage Bankers Association and others are disappointed, however, that the amendment does not exempt Federal Housing Administration, Fannie Mae and Freddie Mac eligible loans from the 5% risk retention requirement. "It is a step in the right direction. But we would like them to go further," said MBA senior vice president Steve O'Connor. The Minnick amendment gives regulators the discretion to set the risk retention requirement between zero and 5%, depending on the quality of the loans. But industry groups really wanted a total exemption for FHA, Fannie and Freddie loans that was included in a subprime lending bill (H.R. 1728) the House passed in May. Only loans guaranteed by the Department of Veterans Affairs and the Rural Housing Service are totally exempt under the Minnick amendment.

Credit scores on FHA single-family loans have risen steadily over the past three years with the average score reaching 689 at the end of September, a 10% improvement from a year ago. Lenders originated a record $328.1 billion in Federal Housing Administration loans in FY 2009 and 44% of the loans have FICO scores above 680. Only 13% have FICO scores below 620, which is generally considered subprime. In FY 2007, when FHA endorsements totaled $55.5 billion, only 19% of the loans had FICO scores above 680 and 47% of the loans had FICO scores below 620. (FICO stands for Fair Isaac & Co., which compiles credit scores on consumers.) "The improved credit quality of FHA's recent originations debunks the myths that FHA is being overrun by subprime loans," said Brian Chappelle, a partner in Potomac Partners of Washington. Mr. Chappelle is basing his beliefs on a recent audit of FHA's single-family portfolio and a FHA report to Congress. He noted that loans with FICO scores above 680 perform four-times better than loans with FICOs below 620.

The sale of $11.5 billion in jumbo servicing rights belonging to the bankrupt Thornburg Mortgage of Santa Fe has cleared another hurdle but it's still unclear when bids will be taken. According to investment bankers familiar with the deal, Thornburg's trustee in Baltimore has approved an advisor to sell the receivables. (The jumbo lender/servicer filed for bankruptcy protection in Maryland earlier this year.) It's still unclear when a formal bid process might start but brokers in the servicing market are aware the deal is in the works. Meanwhile, The Prestwick Group, Alexandria, Va., is selling two small servicing packages - a $34 million package of Fannie Mae/Freddie Mac and private investor rights. The seller is a national bank and the liens are on homes in South Carolina. The company also is selling a $16 million FHA Government National Mortgage Association portfolio. Interactive Mortgage Advisors, Denver, and MIAC, New York, also have packages out for bid.

Tourmalet Advisors, a Connecticut-based hedge fund, is in the process of raising $500 million to invest in nonperforming mortgages, according to an offering circular provided to National Mortgage News. Tourmalet has already invested $460 million in nonperforming loans (NPLs) through its "Matawin Fund" and has formed joint venture partnerships with other vulture funds including Kondaur Capital, Irvine, Calif. Tourmalet was founded earlier this year by Michael Corasaniti, a former managing director of Pequot Capital. During his career he also has worked in research at Keefe, Bruyette & Woods where he served as a vice president. At press time Tourmalet's investor relations department had not returned a telephone call about the capital raise. Hedge funds have been raising money and eyeing the NPL market for 18 months, but to date, few large sales have taken place.

LoanMarket.net, Irvine, Calif., which operates a website offering individual mortgages for purchase, has branched out into offering loan pools. It closed its first pool sale in August and currently has several more packages out for bid, said company principal Jeff Freud. "We hope to close a pool or two a month," said Mr. Freud. For now, the firm is focusing on package sizes ranging from $20 million to $100 million. The company is offering both performing and nonperforming mortgages as well as commercial and residential. Mr. Freud said banks are selling nonperforming loans (usually in small amounts) but noted that none are publicizing their deals. "Deals are closing," he said, "but no one wants to talk about it."

National home prices, including distressed sales, declined by 9.8% in September 2009 compared to September 2008, according to First American CoreLogic and its LoanPerformance Home Price Index. This was an improvement over August's year-over-year price decline of 11.1%. On a month-over-month basis, however, prices declined by 0.4% in September compared to August 2009, reversing a five-month trend of positive appreciation. The decline suggests the return of seasonal housing price patterns. The company revised its methodology for the HPI report beginning with August data to exclude distressed sales (short sales and REOs), which have become an increasingly large share of sales activity. Excluding distressed sales, year-over-year prices declined in September by -6.0% (in August non-distressed sales fell by -6.2% year-over-year). First American said this underscores the negative impact that distressed sales have on the HPI, as distressed sales continue to decline at a larger annual rate than non-distressed sales. When distressed sales were included Nevada (-25.5%) remained the top-ranked state for annual price depreciation with Arizona following close behind (-20.3%). Florida (-17.7%), Michigan (-15.1 %) and Idaho (-14.9%) round out the top five states for price declines. Excluding distressed sales, the worst five states for year-over-year price declines changes slightly. Nevada (-20.4%) still holds the top spot, followed by Arizona (-15.4%), Florida (-14.8%), Idaho (-10.9%) and Washington (-10.3%). The new forecast anticipates continued declines in most markets for the next six months, followed by a rebound in the spring. Above-average levels of foreclosures, inventories and unemployment will continue to take their toll in many major metropolitan markets in the short term. First American expects housing prices to bottom for most markets by March 2010 and then turn positive. In September 2010, the forecast projects that 12-month appreciation for national home prices, excluding distressed, will be 1.1%, bringing price levels for that segment of the market back to levels in May 2004.

Republican leaders on the House Financial Services Committee are calling for hearings on the financial health of the ailing Federal Housing Administration reserve fund, which recently reported a sharp drop in its capital ratio to 0.57%. Citing FHA's deteriorating financial position, Reps. Spencer Bachus (Ala.) and Shelley Capito (W. Va.) are urging committee chairman Barney Frank, D-Mass., to schedule a hearing as soon as possible. "If home prices do not recover, the economic value of the Mutual Mortgage Insurance Fund could fall below zero. We are concerned that such a drop could force HUD to request an appropriation from Congress," the two Republican lawmakers say in a letter. FHA officials maintain that they have taken corrective actions and the insurance fund is in no imminent danger of running out of cash. If necessary, the agency could raise the FHA upfront premium to keep the fund in the black. However, Reps. Bachus and Capito also have concerns about FHA's technological and management capacity. "It is incumbent upon our committee to get prompt answers to many of the questions surrounding FHA's risk management practices and finances," the Republicans say in a letter to Rep. Frank.

Mortgage moratoriums, HAMP and other loan modification programs will continue to create a trailing effect on the overall number of foreclosures, MBA's chief economist Jay Brinkmann said during a press conference regarding the group's National Delinquency Survey. Now there is a longer time line before a loan actually goes into foreclosure, he said. For example, it will be six months before we see foreclosures essentially from delinquencies that occurred in the first part of 2009. For those loans which will go south in 2010, perhaps by the end of 2010 or in 2011 they will go into foreclosure, thus creating the trailing effect. This crisis is different, he said. Normally any kind of economic pick up would help avoid this trailing effect as improvements in home prices would offset some of the foreclosure rate. "The problem is that if you're in an area where prices dropped 30% and you're under water, just because prices come back up 2%-3% it does not help much." The economist noted however that "the trailing effect" is more of a symptom of the economic crisis than a driver of foreclosures. It will have a certain effect on prices in certain markets, but it will have more to do with what is happening in job creation, and jobs creation really won't be impacted by the foreclosure rate."

Even though the recession ended some time this summer, late payments and foreclosures on residential loans continued on an upward course in the third quarter with delinquencies reaching a record 9.64% — a 40% spike from a year ago. According to the Mortgage Bankers Association's National Delinquency Survey, no loan type was spared: delinquencies on prime and subprime mortgages as well as FHA loans all rose during the quarter, reaching new highs. According to figures compiled by National Mortgage News, consumers owe $9.8 trillion on their homes, which means (based on the MBA's late payment rate) that $944.7 billion in mortgages are 30- 60-, or 90 days late or in foreclosure. Roughly $238 billion in subprime mortgages are delinquent as well. The national foreclosure rate rose to 4.47% at the end of September, a record, and a 50% jump from a year ago. The MBA reports delinquencies separate from foreclosures which means 14.11% of all home owners with a mortgage are either in arrears or in some stage of being foreclosed on. Given the national unemployment rate of 10.2%, MBA's findings were not unexpected.