Servicing

The Federal Housing Finance Agency, which has just instituted a final rule on the dollar size of Fannie Mae and Freddie Mac's on-balance sheet holdings, also is seeking comment from the industry regarding what criteria should govern their holdings in the future once they return to health. By law, Fannie and Freddie's portfolios cannot grow any larger than $850 billion, a cap that pertains to the last day of this year. After that, each must shrink its portfolio with the eventual goal of holding just $250 billion in mortgage-related assets. FHFA has published a list of 20 issues including "benefits and risks associated with mortgage portfolios" that it wants comments on. Respondents have 120 days to send in their answers. Fannie and Freddie were taken over by the government in early September and continue to bleed red ink.

House prices fell by another 2.2% in November for the second consecutive month and prices are off by 18.2% over the previous 12 months, according to the Standard & Poor's/Case-Shiller housing price index that tracks home sales in 20 major metropolitan areas. Since the peak in August 2006, prices have fallen 25% and the "freefall" continued in November, according to David Blitzer, chairman of S&P's index committee. Average house prices are now back to first-quarter 2004 levels. "The main force driving down house prices is foreclosures, which are still rising," IHS Global Insight economist Patrick Newport said. He expects house prices will continue to decline over the first half of this year.

The share of delinquent loans that roll into foreclosure status has skyrocketed recently, but MBA chief economist Jay Brinkmann says he is uncertain if the trend will continue. The most recent quarterly data from the MBA showed a slight decline in the roll rate, though it remains elevated by historical standards. Today, about 35% of loans that are 30 days past due during one quarter are subject to foreclosure proceedings in the following quarter. During the 1990s, the roll rate fell in a range of between 10% and 15%. In a conference call with reporters, Mr. Brinkmann said that high roll rates in California and Florida, as well as in Nevada and Arizona, are driving the dramatic national increase. In recent quarters, roll rates in California and Florida have exceeded 60%. In most areas of the country, including the economically struggling industrial Midwest, the increase in roll rates has been less dramatic. "I don't know if the rest of the country is going to follow more of a Michigan example or how much closer we are going to be to the California model," Mr. Brinkmann said.

The Mortgage Bankers Association is trying to get the Obama administration interested in a bifurcated refinancing program that the Treasury Department could implement using funds for the Troubled Asset Relief Program. The MBA program would allow borrowers who are underwater and cannot get help any other way a chance to obtain a new affordable mortgage with a 90% loan-to-value ratio. The government could probably sell the first mortgage but it would end up holding a second mortgage with little or no equity. The second lien would have priority over all other second liens under the MBA concept, and it would be payable on the gain from any future sale or refinancing. "It is geared toward borrowers who have the income and capacity to make a reduced payment," said MBA senior vice president Steve O'Connor. But it is also designed for borrowers who cannot qualify for a loan modification or regulator refinancing because of negative equity or the servicing and pooling agreement, he said.

Fannie Mae estimates it will ask the U.S. Treasury for $11 billion to $16 billion in funds to cover fourth-quarter losses and maintain a positive net worth. The losses stem from what it calls "credit expenses" and fair market writedowns on the value of its massive MBS holdings. Fannie said the "actual amount of the draw may differ materially this estimate" because it is still finalizing its financial statements. It would be Fannie's first draw-down under a senior-preferred stock purchase agreement Treasury set up for Fannie and Freddie Mac when they were placed into conservatorships in early September. Both GSEs can tap Treasury for $100 billion each. Freddie has already received $13.8 billion and is requesting $35 billion more. All totaled, the government will have invested $64.8 billion in taxpayer money in the GSEs when the funding requests are finally approved.

Cramdown legislation pending in Congress could cause a "substantial" surge in bankruptcy filings by consumers, including mortgagors who are currently paying their loans, according to a new report by Friedman Billings Ramsey. FBR notes that banks, thrifts and other large holders of second liens "would most likely be wiped out by a bankruptcy judge in the modification process." Banks with large HELOC portfolios that might be hurt include Bank of America, Citigroup and U.S. Bancorp, among others, FBR predicts. The Mortgage Bankers Association is lobbying to have cramdowns limited to subprime loans originated during the peak of the housing boom and that cramdown relief should be temporary. The House Judiciary Committee is expected to vote on cramdown legislation on Tuesday afternoon. According to a report in American Banker, concessions have been made to the mortgage industry that might soften the blow of cramdowns, including a provision that would allow lenders to share in the appreciation of a home's value with borrowers who discharge mortgage debt in a bankruptcy. Legislators are including language in the bill that would exempt Federal Housing Administration and Department of Veterans Affairs guaranteed loans from being crammed down. The MBA is adamant that a sunset date be attached to any cramdown authority.

The share of delinquent loans that roll into foreclosure status has skyrocketed recently, but MBA chief economist Jay Brinkmann says he is uncertain if the trend will continue. The most recent quarterly data from the MBA showed a slight decline in the roll rate, though it remains elevated by historical standards. Today, about 35% of loans that are 30-days past due during one quarter are subject to foreclosure proceedings in the following quarter. During the 1990s, the roll rate fell in a range of between 10% and 15%. In a conference call with reporters, Mr. Brinkmann said that high roll rates in California and Florida, as well as in Nevada and Arizona, are driving the dramatic national increase. In recent quarters, roll rates in California and Florida have exceeded 60%. In most areas of the country, including the economically struggling industrial Midwest, the increase in roll rates has been less dramatic. "I don't know if the rest of the country is going to follow more of a Michigan example or how much closer we are going to be to the California model," Mr. Brinkmann said.

First American CoreLogic's LoanPerformance Home Price Index, based on November and early December home price data, found national housing prices fell 10.6% for the full year 2008, which it said is the largest decline in more than 30 years. November's decline was 10.2% compared to a year earlier and early December preview data suggest declines continued in the 10 percent-plus range last month. Since peaking in 2004, home prices have fallen 18.5% and are now at the same levels where they were in spring of 2004. Full year 2008 prices fell in 35 states, with California leading the way with a 26.9% decline, followed by Nevada (-22.8%), Arizona (-19%), Florida (-18.2%), and Rhode Island (-13.7%). Since home prices peaked in July 2006, home prices in California have declined 42% on a cumulative basis since their most recent peak, followed closely by Nevada (39%). Prices in Arizona and Florida have declined by 33% cumulatively. First American CoreLogic said in 2008 the number of total unique foreclosure filings increased to 3.4 million, up 76 percent from 1.9 million in 2007 and more than triple the 1.1 million filings in 2006. "Collateral risk continues to depress the housing market with the top four states for price depreciation accounting for nearly half of all outstanding foreclosures. But economic risk is also rapidly rising: California, Nevada and Rhode Island stand out as being among the top 10 states for both price depreciation and highest unemployment. Until home prices and economic activity stabilize, mortgage distress will remain high," said Mark Fleming, chief economist for First American CoreLogic.

While remaining steadfast in their opposition to "cramdowns," the Mortgage Bankers Association acknowledges that supporters are gaining momentum and the trade group has outlined parameters it would like to see included in legislation that would allow bankruptcy judges to reduce the secured portion of a mortgage loan. In a conference call with reporters, MBA representatives said a bill that allows bankruptcy judges to alter the contractual terms of a mortgage should limit the discretion judges have to reduce principal, lower rates or extend terms on a mortgage. MBA chairman David Kittle said that if Congress does go this route, cramdowns should only be allowed after a "waterfall" of other loss mitigation options have been exhausted, including repayment plans, loan modifications, an extension of terms and principal deferral. He also proposed that cramdowns be limited to subprime loans originated during the peak of the housing boom and that cramdown relief should be temporary. "We need to set a permanent sunset date after which judges will no longer have this extraordinary power to alter the terms of a mortgage," Mr. Kittle said, noting that two thirds of bankruptcy repayment plans fail, in which case the borrower typically loses their home to foreclosure anyway. Steve O'Connor, MBA's senior vice president of government affairs, acknowledged that "clearly there is political momentum" favoring supporters of cramdown relief. "We recognize the realities of the landscape. And if in fact cramdowns are implemented, we think there should be some constraints to limit damage to the marketplace."

Freddie Mac may need to make a second draw on the U.S. Treasury Department line of credit - this time for $30 billion to $35 billion - to maintain a positive net worth as it closes its books on the fourth quarter, according to a securities filing by the company. "This estimate is preliminary and based on unaudited information," Freddie spokesman Michael Cosgrove said. 'The actual amount of the draw may differ materially from this estimate as we go through our internal and external process for preparing and finalizing our financial results," he said. Treasury granted Freddie and Fannie Mae each a $100 billion line of credit under a senior preferred stock purchase agreement when the mortgage giants were placed in conservatorships. Freddie secured a $13.8 billion draw after reporting its third quarter results. In the same filing, Freddie said it has reached an agreement with JPMorgan Chase on the servicing of Freddie-guaranteed loans at Washington Mutual, which the New York bank recently acquired. "JPMorgan Chase has agreed to make a one-time payment to Freddie Mac with respect to obligations of Washington Mutual to repurchase any of such mortgages that are inconsistent with certain representations and warranties," Freddie said in its filing with the Securities and Exchange Commission.