Servicing

While a macroeconomic recovery has set in and will continue in 2010, Freddie Mac's chief economist Frank Nothaft said at the SourceMedia Loan Modification Conference in Dallas more bad news is coming for the mortgage market going forward. "We haven't seen the peak of the mortgage delinquency rates." Currently, he said, the serious delinquency rate — or number of loans 90 days plus late in mortgage payments among Freddie Mac loans — is the highest it has been since the 1930s. Compared to 0.5% in 2006, it spiked up to 5.4% in 2009, showing how the mortgage crisis has moved from the subprime to the conventional arena. Also, in 2005 the share of subprime loans serviced in the U.S. that defaulted represented 46%, or almost half, during the first half of 2009 that percentage dropped to 11%, with most defaulted loans being prime or alt-A. The economist noted, nonetheless, that there will be a recovery, however modest. The most recent unemployment data are not heartening and will continue next year at least during the first quarter, he said. However, Mr. Nothaft theorized that the aggressive monetary policy, the fiscal policy and the stimulus package benefits will lead to sustained recovery over time.

The Treasury Department has turned down Fannie Mae's request to sell roughly $2.6 billion in low-income housing tax credits to Goldman Sachs. The denial letter came late in the day Friday. The Federal Housing Finance Agency had cleared Fannie to sell the LIHTCs but the ultimate decision rested with Treasury. (Berkshire Hathaway had also expressed an interest in buying the tax credits.) In a filing with the Securities and Exchange Commission, Fannie — without mentioning Goldman — said it had an offer to sell the credits for "a price that exceeds their current carrying value." According to combined press reports, Treasury nixed the sale because it was not in the best interests of taxpayers. Over the past five quarters Fannie has lost $85 billion. Goldman could have used the LIHTCs to reduce its tax burden to the government.

Fannie Mae has rolled out a new program under which it will offer market-rate leases for terms of up to a year to troubled borrowers who turn over the deeds to their homes. The company offered no estimates on how many borrowers it thinks might use the program. The GSE's "Deed for Lease" effort is designed for homeowners headed toward foreclosure that do not qualify for loan modifications. They must document that the market rate rent does not exceed 31% of their gross income. Buyers of foreclosed properties are to assume the leases. Since January, Fannie has offered month-to-month leases to tenants whose landlords have lost their properties to foreclosure. Freddie Mac has offered month-to-month leases to both tenants and former borrowers since March. To date, neither effort has generated much use. Last month, Fannie said it had executed just 200 leases to date.

Ohio's attorney general is suing American Home Mortgage Servicing — a business controlled by vulture fund investor Wilbur Ross — accusing the company of what the state calls "incompetent and inadequate customer service." State attorney general Richard Cordray levied a plethora of charges against AHMS, including failure to offer loan modifications on a timely basis and "unfair and deceptive" loan practices. According to the lawsuit, AHMS required loan modification agreements that forced consumers to pay excessive fees and waive their rights in order to get help. The suit also alleges that the terms of loan modifications were unconscionably one-sided in favor of AHMS. Mr. Ross built AHMS from two failed nonprime servicers: Option One Mortgage and American Home Mortgage. AHMS is based in Coppell, Texas. It services more than 12,000 subprime and prime consumers in Ohio, according to the AG. Mr. Cordray is seeking a permanent injunction against AHMS. The servicer, though, is fighting back. It is countersuing the state, saying the allegations are false and cannot be supported. AHMS EVP and chief legal officer Jordan Dorchuck said the firm is committed to "keeping borrowers in their homes." It says it tried to meet with the Ohio AG to discuss the issues raised it the lawsuit but the state refused.

The Federal Housing Finance Agency has cleared Fannie Mae to sell roughly $2.6 billion in low-income housing tax credits to unidentified third-party investors believed to include Goldman Sachs & Co. and Berkshire Hathaway. In a new SEC filing, Fannie notes that it has a "nonbinding letter of intent" to transfer its equity interests in the LIHTCs for an undisclosed amount. Fannie says it will sell them for "a price that exceeds their current carrying value. Upon completion of the contemplated transfer, the unrelated third-party investors would be entitled to receive substantially all of the tax benefits from our LIHTC investments for a specified period of time." Fannie says its regulator told it that it would not object to the sale. The FHFA is now asking for Treasury's approval on the deal. Fannie says that if it cannot sell the tax credits it will take an other-than-temporary impairment charge "to reduce" their carrying value to zero.

Fannie Mae posted yet another stunning loss in the third quarter, $18.8 billion, noting that it now owns or guarantees close to $200 billion in nonperforming assets. The steep loss resulted in the government-controlled GSE having a net worth deficit of $15 billion at the end of September. In tandem with the loss, its regulator has asked the Treasury Department for $15 billion to bring the GSE's net worth above zero. Over the past five quarters Fannie has lost $85 billion. In a new filing with the Securities and Exchange Commission, Fannie offered a slight glimmer of hope for the future: its guarantee fee income rose 12% in the quarter to $1.9 billion (compared to the second quarter). It also predicts that "absent further economic deterioration" its credit-related expenses will be less in 2010 than this year. With 3Q under its belt, Fannie now has combined credit loss reserves of $65.9 billion. Its credit book of business now stands at $3.23 trillion. Fannie Mae and its sister company, Freddie Mac, were taken over by the government in September 2008 and placed into separate conservatorships.

Driven by charges and adjustment expenses in its domestic mortgage insurance business, The PMI Group Inc., Walnut Creek, Calif., posted a net loss of $93 million for the third quarter, a marked improvement over the same period last year when it lost $229 million. The MI suffered $337 million of consolidated losses and loss-adjusted expenses in the quarter, compared to $383 million one year prior. Net premiums written came in at $167 million for the third quarter, down from $176 million during the same quarter last year. The decrease was from a lower volume of new insurance written and higher refunded premiums from rescissions of insurance previously written. PMI disclosed it is in negotiations with one state — which it did not name — over an interpretation it is in violation of that state's financially hazardous condition regulation. If the state prevails the company indicated it could be forced to stop underwriting policies in that state. PMI has a risk to capital ratio of 18.5-to-1. It took steps which resulted in an additional $139 million in surplus capital for the company. There are 14 states that have some form of risk-to-capital standard. In California and Arizona (where PMI is domiciled), as well as North Carolina, steps have been taken to relax the risk to capital ratio requirement of 25-to-1. Meanwhile, PMI is in discussions to write new insurance policies should it fail the risk to capital standard through a recapitalized existing subsidiary.

PennyMac Mortgage Investment Trust, a mortgage vulture fund created by a former Countrywide executive to profit from the mortgage crisis, posted a $730,000 loss for the period ending Sept. 30. Meanwhile, the company confirmed recent market rumors that it is working on a conduit to provide small mortgage lenders "an outlet for their newly originated mortgage loans." PennyMac founder and CEO Stanford Kurland said in a statement that the company has reviewed $6.9 billion in potential acquisitions of nonperforming mortgage assets but refuses to overpay for product. "While some market participants have been willing to accept lower yields and bid more aggressively, we still believe that it is in the best interest of our shareholders over the long term to remain patient in order to maximize the returns from our long-term investment opportunities," Mr. Kurland said in a statement. A publicly traded REIT, PennyMac manages and services about $324 million in assets. Since going public in August, its stock has been thinly traded. On Friday its shares were trading just above their 52-week low of $17.72. Its high is $20.

With the nation's unemployment rate busting through the 10% mark in October, President Obama on Friday signed legislation extending the $8,000 first-time homebuyer tax credit and giving additional tax breaks to certain homeowners trading up. Passed overwhelmingly by Congress, the bill would provide a $6,500 tax credit to homeowners who are buying a new primary residence beginning Dec. 1. The language mandates that to get the credit the homeowner must have owned their home for five consecutive years of the previous eight. But there are caps on the tax credits. They only apply to individual buyers who make no more than $125,000 and $250,000 for couples. There is also an anti-flipping provision: Any homeowner who collects the credit and sells within three years must return the money. The FTHB was extended to cover consumers signing a contract by April 30 and closing by June 30. Meanwhile, the Department of Labor reported Friday that the nation's unemployment rate rose above 10% for the first time since 1983 in October, a much worse jump than expected. The increase in joblessness will lead to an upswing in residential mortgage delinquencies. In October the unemployment rate spiked to 10.2%, compared to 9.8% in September. Economists had forecast an increase to 9.9%.

Residential servicers, a sector that is grappling with a potential tidal wave of loan modifications, are beginning to hire "like crazy" according to Mary Coffin, a senior servicing executive with Wells Fargo Home Mortgage. Ms. Coffin, speaking at SourceMedia's Loan Modification Conference in Dallas, noted that new servicing employees working on modifications are receiving four to five weeks of training in order to deal with the volumes they are facing. An EVP in charge of loan servicing for the nation's second largest player in mortgages, she said servicers are going much deeper in collecting financial information from the borrower. "Servicers have become very holistic looking at the entire problem. We are actually underwriting the financial condition of the borrower in order to pick the right solution that is sustainable," she told conference attendees. The Wells executive noted that there is still much confusion regarding documentation under the government's Home Affordable Modification Program, including re-requesting documents and losing documents. "Because of all the attention on mods, we went from a day when borrowers called to say, 'What can I do?' to sorting through calls and educating borrowers. We are still educating them on what you have to look like before you can get a mod. Borrowers have a high anxiety and fear when signing complex documents."