Servicing

An attorney at Pillsbury Law predicts that the "opaque credit default swap market" is poised to spur a spike in litigation as CDS buyers seek to recoup losses and sellers seek to reduce or avoid payment obligations. Ed Flanders, head of Pillsbury Law's financial services litigation team, said CDS counterparties are scrambling to assess their exposure. "Once-profitable hedge funds are marshaling their cash assets to meet substantial CDS payment obligations," he said. Pillsbury and the Atlantic Legal Forum are hosting a conference on the future of CDS in New York on Nov. 6.

Merrill Lynch, which has agreed to be acquired by Bank of America, took another set of partially mortgage-related multibillion-dollar writedowns in the third quarter that contributed to a net loss of $5.2 billion. The writedowns included $5.7 billion resulting from a previously announced sale of super-senior asset-backed security collateralized debt obligations. Another $3.8 billion was lost principally from severe market dislocations in September, including real estate-related asset writedowns and losses related to certain government-sponsored entities and major U.S. broker-dealers, as well as the default of a U.S. broker-dealer. In addition, $2.6 billion in net losses resulted primarily from completed and planned asset sales across residential and commercial mortgage exposures.

As part of a larger financial markets rescue package by the Swiss government, the Swiss National Bank and UBS have come to an agreement designed to "materially de-risk and reduce" UBS's balance sheet by transferring up to $60 billion of the latter's partially mortgage-related problem assets into a newly created fund. UBS said problem assets transferred into the fund include U.S. securities that were valued at about $31 billion as of Sept. 30 in the following categories: subprime, alt-A, prime, commercial real estate and mortgage-backed securities, student loan auction rate certificates and other securities backed by student loans, as well as a reference-linked note program. At completion of the transaction, UBS's net exposure in these risk categories will be reduced to nearly zero (compared to $44.2 billion on June 30), with residual long positions held by UBS in these asset classes hedged through existing short positions, including credit protection embedded in the RLN programs, UBS said.

Lender Processing Services, Jacksonville, will offer servicers using its systems access to servicing technology from Reverse Mortgage Solutions.Dan Scheuble, co-chief operating officer at LPS, said the partnership extends LPS's reach into the growing business for reverse mortgage loans. The primary market for reverse mortgage loans, or home equity conversion mortgages, is homeowners over the age of 65 who have paid off their mortgages. Currently, there are approximately 34 million seniors in the nation. LPS estimates that 12.5 million seniors currently own their homes mortgage-free, representing $4 trillion in equity.

The housing market will hit bottom between mid-2009 and mid-2010, economist Christopher Thornberg said at the REOMAC Fall Conference in Hollywood Beach, Calif.. At the show's opening session, he predicted the industry will see negative growth in the third and fourth quarters and through most of 2009. Positive growth will begin in the fourth quarter of 2009 and first couple of quarters of 2010, he said. "In the second half of 2010 things will finally start to get back up and running," said Mr. Thornberg. "The scarring of this downturn will have worn off. Your typical homebuyer has a two year memory. People are going to be so scared, they're not going to touch it for two years. By mid-2012 they will start buying again." Housing markets, when they hit bottom, they don't bounce, he added. "It's not like the stock market. Housing markets splat. They hit bottom and stay there." He encouraged REOMAC members, which include asset managers and REO agents, to keep some perspective, because mortgage rates are still lower than they were in 2000. States like California have to see prices come down 40-45% to get back in line with historic norms relative to incomes, he said. "Every state is different. We're getting there."

A group of Idaho appraisers have filed a class-action lawsuit against the Bank of America-owned Countrywide Financial Corp., claiming the lender used strong arm tactics, intimidating appraisers to generate reports and "blacklisted" some for not cooperating with the company. The lawsuit, filed in U.S. District Court in Seattle, claims Countrywide forced appraisers to use improper appraisal techniques that benefited the lender. BoA/Countrywide is the nation's largest residential lender, according to figures compiled by the Quarterly Data Report. The lawsuit claims Countrywide's actions caused "substantial damage to thousands of appraisers on top of distorting real estate prices in the marketplace." At press time, a spokesman for BoA had not returned a telephone call about the matter.

ForeclosureRadar reports banks filed 904 notices of default in Orange County in September, down 64% from August and 25% from a year ago, according to a story in The Orange County Register. But the dramatic decline in defaults (which initiate the foreclosure process), is due to Senate bill SB 1137, according to ForeclosureRadar. The bill's foreclosure provision enacted on September 8 stipulates that servicers must contact a homeowner at least 30 days before filing a NOD and explain what options the borrower has to avoid foreclosure. Sean O'Toole, president of the company, has noted that the drop in foreclosure starts would be temporary as banks adjust to the new law, calling it a paperwork issue.

Single-family housing starts dropped 12% in September to a level not seen in 26 years and construction activity has fallen by 70% since the peak of the housing boom in January 2006. The U.S. Census Bureau reported that single-family housing starts, on a seasonally adjusted annual rate, declined to 544,000 units in September compared to 618,000 in August. Compared to the year ago starts are down a stunning 42%. The multifamily sector has held up well. Single-family construction has not been this weak since the 1982 recession. The National Association of Home Builders is calling on Congress to pass another economic stimulus package with a "real" tax credit to stimulate home buying and reduce inventories. The $7,500 first-time homebuyer tax credit that Congress passed in July is really an interest-free loan that the buyer has to pay back to the government. NAHB executive vice president and chief executive Jerry Howard said fixing the tax credit and raising it to $10,000 is his group's top priority. "We want to make it a little bit richer, drop the recapture and extended it to all buyers," Mr. Howard said.

Federal Housing Administration lender and Ginnie Mae issuer Lend America, Melville, N.Y., said it is finalizing a "structured transaction" designed to help "a major global financial institution" refinance a roughly $1 billion pool of sub-performing loans into mortgages with more affordable terms. Lend America declined to name the client. The effort is being done through the government's new "Hope for Homeowners" program. The company said the move is part of a new effort to help first-lien holders, including Wall Street banks and hedge funds, "maximize principal recapture and help homeowners avoid foreclosure" by tapping the new government program. Lend America said it has 300 FHA mortgage specialists in a central location who receive a mandatory 10 hours of H4H classroom training and certification. It said these specialists are able to "contact delinquent borrowers, assess affordability and work under appropriate guidelines to refinance a mortgage within as little as 10 days." Under the H4H program, lenders can refinance struggling borrowers -- who obtained mortgages prior to January 2008 -- into more affordable loan programs.

To counter rising mortgage rates, the National Association of Realtors is urging the Treasury Department to "aggressively" increase its purchase of Fannie Mae and Freddie Mac mortgage-backed securities. "We believe that more active MBS purchases will reduce spreads and therefore mortgage interest rates and help bring more homebuyers into the market," NAR says in a letter to Treasury secretary Henry Paulson. Treasury purchased $5.1 billion in agency MBS in September and has pledged to purchase more in an effort to increase market liquidity. Fannie and Freddie also are expected to increase purchases of their MBS. But so far, market watchers say the impact has been minimal. The trade group says that "investment is flooding away from agency MBS to bank credit products" now that the Federal Deposit Insurance Corp. has guaranteed unsecured bank debt. This "unintended" consequence, NAR says, has pushed mortgage rates up to 6.5%. "For this reason, we urge Treasury and Federal Housing Finance Agency to more aggressively participate in the MBS market by increasing purchases of agency MBS." The FHFA regulates Fannie and Freddie.