Servicing

Mortgage bankers will be allowed to securitize FHA and VA guaranteed loans without a risk retention requirement and certain GSE loans will be exempt as well, according to final provisions of the regulatory reform bill worked out late Thursday night. As a technical matter, mortgages backed by Fannie Mae, Freddie Mac and other issuers will be required to retain up to 5% of the credit risk if the loans are not eligible for a total exemption under a "qualified mortgage" test. "I believe chances are very good that in the future almost every mortgage that Fannie and Freddie either buys or securitizes will be qualified mortgages under the risk retention provision," said Glen Corso, managing director of the Community Mortgage Banking Project. Under the agreed final bill, federal banking agencies, the Securities and Exchange Commission, and the Federal Housing Finance Agency will draft rules establishing underwriting standards and allowable product features for these very safe, fully documented "qualified" mortgages. Qualified mortgages also have to meet a new and tougher "ability to repay" standard in the bill along with a 3% limit on points and fees and a separate 2% limit on bona fide discount points. Regulators have the flexibility to set risk retention percentage lower than 5% for residential mortgages that don't meet the qualified mortgage test. Meanwhile, securitizations of mortgages guaranteed or insured by the Federal Housing Administration, Department of Veterans Affairs, Rural Housing Service and other federal or state entities are totally exempt from risk retention. "We commend the House and Senate Conferees for adoption of the qualified mortgage provision that exempts soundly underwritten, stable, consumer friendly mortgages from the risk retention requirements in the final version of the financial reform bill," Corso said.

Existing-home sales in the seven-county Chicago metropolitan region rose 34% in May from the same month a year ago. Despite the gain, however, the average price dipped 2% and the median was down 2.5%, according to an analysis of resale activity by Jim Merrion, regional director of Re/Max Northern Illinois network. But two other key benchmarks-time on the market and the number of distressed sales-point to an improving marketplace. On average, houses that sold in May were on the market for 164 days. That's still more than five months, but it's down from the 184 days recorded in May 2009. Moreover, only a third of the houses sold in May were either foreclosures or short sales, down from 35% in the same month a year ago. Nearly 2,500 distressed properties were sold in May, 71% of which were repossessions and 29% were short sales. Though distressed sales were a smaller share of the market, their number was actually up 22% year-over-year, with short sales jumping 49%, according to Merrion. "We'd like to believe that the increase in short sales suggests lenders are finally beginning to master the process of evaluating and approving short sales, but the average market time for short sales actually has been higher during the first five months of this year than during the same period last year, " he said. "When average market times for these properties show a downward trend, it will be a positive indication, but we aren't there yet."

Residential servicers completed roughly 159,000 loan modifications in May, including 112,000 proprietary restructurings and 47,000 HAMP mods, according to The Hope Now alliance. To date, servicers have completed 800,536 permanent loan modifications. Seventy-seven percent of proprietary (non-HAMP) modifications include lower principal and interest payments, which means these programs are being designed for longer-term sustainability and homeownership.

Fannie Mae is getting tough on borrowers who default on their mortgages and walk away from the house even though they have the financial capacity to make the payments. The government-sponsored enterprise said it will take legal action against borrowers who opt for a "strategic" default and seek to recoup the remaining mortgage debt in jurisdictions that allow deficiency judgments. In addition, such borrowers will not be eligible for a Fannie Mae-backed loan for seven years under the new policy. "Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting," said Terence Edwards, executive vice president for credit portfolio management.

Though executives at many private-equity firms continue to raise capital and scout opportunities, few have emerged victorious in the bidding for failed institutions in recent months. The reasons are many. The pace of failures has been slower than dealmakers expected. Methodical due diligence is slowing deals for banks that are still open, in which government loss-sharing is not available to protect buyers. And regulators remain reluctant to quickly sign off on deals that do not involve traditional bank buyers. "You're not going to see floodgates opening up soon in terms of a plethora of deals," said Mark Graf, an investment professional at Aquiline Capital Partners LLC, a New York private-equity firm. "The challenge is finding the right confluence of events with the right return on investment, and you have to meet the regulators' guidelines." The overall tone from private-equity executives appears calm despite an eagerness to put billions of dollars in capital to work. Most agree that as failures accelerate and traditional buyers prove scarce, private equity will be in the thick of things, ready to pursue an aggressive consolidation strategy. There have been notable deals, some point out, including one that closed last week where Aquiline bought common stock and convertible preferred shares that would give it a 24.9% of BNC Bancorp in High Point, N.C. BNC expects to use the funding for traditional and government-assisted acquisitions. Still, it took time for Aquiline to green-light its first direct U.S. bank investment. Graf, who will join BNC's board, has been with the private equity firm since late 2008 and former Wachovia Corp. CEO G. Kennedy Thompson came on board more than a year ago. Graf said, however, that Aquiline is looking at similar deals in other parts of the country.

Plenty of ink has been spilled about the plight of struggling homeowners trying to fend off foreclosure while fighting with residential servicers that are unwilling to modify their loans. But this column won't be addressing that issue. Instead, I'll be focusing on the disadvantaged servicer.

The American Securitization Forum called for the Senate to "seriously consider and accept the House offer on covered bonds." The ASF said it believes the amendment would "facilitate...a covered bond market as it includes important provisions for default and insolvency of covered bond issuers. The group, which represents both buyers and sellers of securitizations, also noted that it feels the House offer "subjects covered bonds to appropriate securities regulation by federal regulators."

House and Senate conferees shaping the final regulatory reform bill tentatively accepted an amendment by Rep. Scott Garrett, R-N.J., that would create a new legal and regulatory framework for the development of a covered bond market in the United States. Bank issuance of covered bonds backed by residential and commercial mortgages is more common in Europe. Foreign banks service and keep the mortgages on their books in a manner unlike the mortgage-backed securities used more commonly in U.S. where the underlying mortgages have traditionally been placed in separate, off-balance-sheet trusts. "Covered bond legislation offers a way for the government to provide some certainty for private enterprises to find a way to generate liquidity through innovation of a new marketplace," Rep. Garrett said. The New Jersey congressman also stressed that covered bonds would open the door for lenders to originate mortgages that are not guaranteed by the government. Under the Garrett amendment, the Treasury Department would be the primary regulator of covered bonds, and set standards and reporting requirements for issuers. But for the market to move forward, the Federal Deposit Insurance Corp. must continue its policy of not seizing mortgages that are backing covered bonds when the sponsor bank fails. House Financial Services Committee chairman Barney Frank, D-Mass., noted that Treasury and FDIC officials have raised some questions about the covered bond proposal. Rep. Frank said the conferees would not formally approve the Garrett amendment until Thursday, giving regulators time to refine their concerns and "tell us what they are," Frank said. Sen. Bob Corker, R-Tenn., was prepared to offer a similar covered bond amendment on the Senate side but House members offered their amendments to the regulatory reform bill first.

Treasury secretary Timothy Geithner early next year plans to present a proposal for "fundamental reform" of Fannie Mae and Freddie Mac along with other facets of the housing finance system. He told a TARP Congressional oversight panel that Treasury officials are examining options for restructuring the GSEs which have been in conservatorship for almost 20 months and could wind up costing taxpayers $400 billion. Together, the two account for about 70% of all originations in the nation. FHA accounts for most of the balance with portfolio lending (mostly jumbo) making up a sliver of all originations. The secretary said the agency will not stop with its study of Fannie and Freddie. "The range of things that contributed to this mess went well beyond the basic incentive problems and moral hazard problems that prevailed at the GSEs," he said. He told the Troubled Asset Relief Program panel that today Fannie and Freddie are being managed more conservatively. "At our insistence, they have put in place much more conservative underwriting standards. They are charging more for their guarantees to remedy some of the mistakes they made earlier," he said.

The Federal Deposit Insurance Corp. is receiving higher bids for failed bank assets and officials at the agency say they are beginning to see signs of a recovery in the financial services industry. In a new memo, the agency notes that it is seeing "more bidders and higher bids" for failed institutions. "Not only are failed insured-depository institutions with good deposit franchises attracting better prices, but there have also been higher-than-expected proceeds from assets sales." In 2009, regulators closed 140 insolvent banks and thrifts. So far this year, there have been 83 bank failures. "We still expect bank failures to peak this year, and start tapering off next year as the industry continues to heal and recover," FDIC chairman Sheila Bair said at a Tuesday FDIC board meeting. The FDIC staff memo highlights several indicators showing the banking industry is starting to recover. More than half of all FDIC-insured institutions were profitable in the first quarter. Banks are reporting lower new loan loss provisions and net charge-offs have declined for the past four quarters. In addition, the number of institutions on FDIC's problem bank listed increased by only 10% in the first quarter to 775. In the previous quarter the number of problems bank jumped 27% to 702. "(S)igns of a slowdown in the growth of this number are a positive indicator that the industry could be slowly improving," the memo says.