Servicing

Lenders living off of refinancings will be sorely disappointed by a new forecast from Fannie Mae. The GSE sees refinancings falling to just 34% of total production in fourth quarter, the lowest reading in almost a decade. (The third quarter of 2008 was a near disaster for refinancings with a reading of 38%, according to figures compiled by the Quarterly Data Report. In 3Q08 the stock market was about to begin a freefall with Fannie being taken over by the government and several other large financial firms failing or teetering.) In the first quarter of this year, refis accounted for 65% of residential fundings. Last year refis accounted for 67% of production.

It appears that House/Senate conferees are leaning toward adopting risk retention language requiring issuers of residential MBS to hold a "vertical" slice of securitized assets, which means mortgage bankers will be affected by losses on all tranches, not just one. According to interviews with lobbyists working the issue, the details will not be hammered out until next Tuesday, at the earliest. "We think we're going to be okay on the issue but you never know," one MBS investor told National Mortgage News. It appears that language stipulating 5% risk retention for "qualified" mortgage assets (Fannie Mae, Freddie Mac, FHA and other government products) will survive, though there was even talk of cutting that down to 3% for certain loans. If issuers are required to take on vertical risk they suffer losses on all MBS tranches that are created. Under a "horizontal" model only the most subordinated bond is first in line to absorb credit losses. None of the executives interviewed wanted to be identified because of the sensitive nature of the talks. The House and Senate are trying to shape a compromise bill on overhauling regulation of financial services, including many facets of mortgage banking.

Willis North America, a subsidiary of insurance broker Willis Group Holding, has started a distressed assets practice to advise clients on how they can manage the risks associated with distressed, foreclosed or abandoned properties. The new unit will be headed by Brian Ruane, national real estate and hotel practice leader, who founded the group in 2005. It will bring together resources from Willis' real estate and hotel, construction, environmental, executive risks, financial services and mergers and acquisitions practices, and its loan protector unit. The distressed assets practice coordinates capabilities from across Willis' practice areas to structure insurance programs that respond to a range of risk management and insurance issues related to distressed assets. Major areas of focus include property, liability and environmental insurance; forced-placed coverage; insurance for real estate-owned assets; professional liability insurance and construction insurance for incomplete projects.

Fannie Mae will institute a national policy to provide relief for homeowners who have toxic drywall in their homes. Under the company's broad "Unusual Hardships" policy, Fannie Mae will direct its servicers to provide qualifying borrowers who have problem drywall up to six months of forbearance on their mortgage loan payments. The company will also instruct servicers to minimize the derogatory credit impact for borrowers who are current on their loans and complying with the terms of the forbearance. "This relief is intended to help borrowers who need payment flexibility as they take steps to mitigate problems with problem drywall," said Terry Edwards, executive vice president. "The issue potentially affects thousands of homeowners in a number of states, and we want to support those who are responsibly trying to honor their mortgage obligation in good faith while correcting the problem and protecting the health and safety of their families." Servicers will be required to document and evaluate each borrower's circumstances on a case-by-case basis, and require a property inspection to confirm the existence of the problem drywall. The servicer may offer forbearance terms initially for no more than six months. Extended terms require Fannie Mae approval. Fannie Mae's "Unusual Hardships" policy will go into effect in mid-July.

Fannie Mae is telling its servicers that they may immediately suspend or reduce mortgage payments for borrowers whose properties or income are negatively impacted by the Gulf oil spill. Michael J. Williams, president and chief executive, said the policy is in place to support those who are experiencing a disaster-related hardship through no fault of their own and are acting in good faith to meet their mortgage obligation. Fannie Mae is allowing servicers to suspend or reduce a borrower's loan payment for up to 90 days. During that time, the servicer is to assess the impact the disaster is having on the condition of the property or on the borrower's financial condition. At the conclusion of that assessment, Fannie Mae said, servicers have additional flexibilities to evaluate the appropriate loss mitigation alternative based on a case-by-case determination, including an additional three months of forbearance, a loan modification or other customized solution. Freddie Mac did not return a request for comment on whether it had similar measures in place by press time. In related news, Citigroup said its CitiMortgage subsidiary is suspending foreclosure actions in the affected areas from the oil spill until Sept. 17. Borrowers with first mortgages owned by CitiMortgage who meet certain other criteria will not be subject to foreclosure sales or foreclosure notifications. While CitiMortgage does not own all of the loans it services, the company hopes to help as many borrowers as possible with this initiative. In addition, evictions on affected real estate-owned properties cease during this time. CitiMortgage borrowers occupying residences in ZIP codes within 25 miles of affected coastal areas will be eligible for the program.

Quarter-to-quarter delinquency rates for all commercial/multifamily mortgage investor groups reviewed by the banking group continued to increase in the first quarter, with securitized loans reaching the highest level since the series began in 1997. The Mortgage Bankers Association Commercial/Multifamily Delinquency Report shows that compared to 4Q09 the 30-plus-day delinquency rate on loans held in commercial mortgage-backed securities rose 1.54 percentage points to 7.24%. Delinquencies for five of the largest investor groups reviewed—commercial banks and thrifts, CMBS, life insurance companies, Fannie Mae and Freddie Mac—"remain below levels seen in the early 1990s, some by large margins," the MBA said. The 60-plus-day delinquency rates increased on loans held in life company portfolios by 0.12 percentage points to 0.31%, on multifamily loans held or insured by Fannie Mae by 0.16 percentage points to 0.79%, and on multifamily loans held or insured by Freddie Mac increased 0.05 percentage points to 0.24%. The 90-plus-day delinquencies on loans held by FDIC-insured banks and thrifts also increased by 0.32 percentage points to 4.24%. These findings are significant since together these groups hold over 80% of commercial/multifamily mortgage debt outstanding—excluding construction and development loans, which are not presented in the report. MBA's Jamie Woodwell attributed the deterioration to economic weakness noting that unless there is growth in jobs and consumer spending, the CRE mortgage market will not be stabilizing any time soon.

Mortgage Industry Advisory Corp. will auction off a $1 billion portfolio of residential servicing rights tied to loans controlled by Freddie Mac. The bulk receivables are backed by fixed-rate loans with delinquencies of just 1.28%. MIAC did not identify the seller but said the product has national "distribution." (The New York-based firm also did not return a telephone call about the matter.) Several other bulk deals are in the market, including a $23 billion pool of servicing rights once owned by AmTrust Bank of Cleveland. The FDIC is offering the AmTrust package through Merchant Milestone Partners.

Even though residential servicers are posting stronger loan modification numbers, a sizable amount of these mortgages could default again within a year, according to a new report from Fitch Ratings. Dow Jones reported that the rating agency's findings reinforce criticism that the government's Home Affordable Modification Program will only result in delaying the inevitable foreclosure filing for mortgagors who cannot afford to remain in homes due to a number of factors—including loss of income, a high level of household debt and reduced property values. HAMP pays mortgage-servicing firms to modify mortgages and find other ways to keep people in their homes. Since HAMP was launched early last year, servicers have been making slow but steady progress with modifications under the program. By balance, about 15% of all residential mortgage-backed securities loans have received some sort of modification through May, up from 10% last September.

The Securities and Exchange Commission Wednesday accused the former owner of Taylor Bean & Whitaker with orchestrating a massive equity and MBS fraud tied to his firm's warehouse borrowings from Colonial Bank, a depository it tried to take control of last summer using TARP money. In a civil complaint, the SEC says TBW owner and CEO Lee Farkas created $1.5 billion worth of "fictitious" whole loans and impaired MBS which were pledged to the bank's balance sheet and served as collateral for warehouse lines of credit. The government says the nonbank ran into "liquidity problems" and began over-withdrawing on its warehouse lines which led to the equivalent of a check "kiting" scheme at the bank. The agency says the scam predated TBW's attempted takeover of Colonial, a troubled bank, by about 18 months. In the spring of last year TBW tried to buy a controlling stake in the Alabama-based warehouse lender, using $200 million of its own money (most of it borrowed using servicing rights as collateral) and $100 million from private investors. These investors included several nonbanks that also were warehouse clients of Colonial. The bank, which failed last summer, was at one point the nation's largest warehouse provider. Using TBW's $300 million investment, Colonial had applied for $550 million of Troubled Asset Relief Program funds to stabilize its capital position. Farkas could not be reached for comment. TBW filed for bankruptcy protection last fall.

The regulator of Fannie Mae and Freddie Mac is directing the troubled GSEs to move the trading of their stocks to the Over-the-Counter Bulletin Board market while declining to answer questions about a reverse stock split. "We're not getting into that," said a Federal Housing Finance Agency spokeswoman when asked why the regulator didn't direct the two mortgage giants to declare a reverse stock split. Sources say the GSEs were informed of the move last week and were caught off guard. In trading Wednesday, their stocks plunged in value by 40%. The OTC Bulletin Board is operated independently of the 'Pink Sheets' market which is for private firms. OTCBB requires regular SEC filings while the Pink Sheets does not, said a Freddie Mac spokesman. Last Friday Fannie was in violation of a New York Stock Exchange requirement mandating a publicly traded firm to maintain a minimum average closing price of $1 for 30 days. Agency chief Edward DeMarco cautioned that FHFA's "determination to direct each company to delist does not constitute any reflection on either enterprise's current performance or future direction, nor does delisting imply any other findings or determination on the part of FHFA as regulator or conservator." Since being taken over by the government in September 2008, Fannie and Freddie continue to lose money. To date, the two have required $140 billion of assistance from the Treasury to maintain their net worth positions above zero. Over the past 52-weeks Fannie's share price has ranged from a low of 51 cents to a high of $2.13. Freddie's 52-week low is 53 cents, its high $2.50.