Servicing

Residential mortgage companies cut 5,500 full-time workers in April despite rising home sales and low mortgage rates. The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector fell to 247,900 positions in April from 253,400 in March. The poor showing came amid reports of hiring by servicers in their loan modification units. But although the servicing sides of many firms are hiring (or at least not laying people off), production jobs are being cut because of weak loan demand, which could get even weaker now that two federal homebuyer tax credits have expired. Friday's job report also revealed that employment in the construction industry and commercial banking fell in May. (There is a one-month lag in BLS' reporting of mortgage banker/broker sector employment.) Construction jobs fell by 35,000 in May, offsetting gains in the prior two months. Commercial banks reduced their payrolls by 500 workers. Overall, Friday's jobs report was disappointing to analysts. Most of the 431,000 increase in jobs reflected the hiring of temporary government census workers. Only 41,000 of the new hires involved private sector jobs. The nation's unemployment rate edged down to 9.7% in May from 9.9% in April. Meanwhile, stocks tumbled early in the morning and the yield on the 10-year Treasury fell to 3.26%, once again nearing its 52-week low of 3.1%.

Rep. Brad Sherman, D-Calif., is urging House conferees on a regulatory reform bill to support a Senate-passed amendment aimed at reforming the credit rating process that led to AAA-ratings for subprime mortgage-backed securities that have subsequently faced several waves of downgrades. The amendment by Sen. Al Franken, D-Minn., directs the Securities and Exchange Commission to create an independent panel that selects the credit rating agency for initial ratings of MBS. Sen. Franken said his amendment attracted the support of nine Republican senators because it addresses the conflicts of interest in allowing issuers to shop for the best rating. Rep. Sherman offered a similar amendment during a House Financial Services Committee markup of a similar bill but it was not accepted. The committee chose to go with a study instead. "I don't think we need another study," Sherman said. Attempts to get a response from rating agencies had not been successful at press time.

Bottom feeders are picking up mortgages on non-performing income properties for as little as 10 cents on the dollar, a group of real estate writers meeting in Austin, Tex., was told. While the "rule of thumb" for re-pricing assets is at 40-60% from peak values, hotel notes are being marked down to 80-90% and those on some retail properties for even less than that, said Rich Siegler, senior managing director of Pathfinder Partners, San Diego. Mortgages on retail projects "in places like Las Vegas that should never have been built—we call them 'Monuments to Stupidity'—are being written down 90% or more," Siegler said at a conference sponsored by the National Association of Real Estate Editors. Pathfinder Partners was formed in 2006 to buy loans on "unusually high-risk" income producing properties, loans, said Siegler, which "tended to be underwritten at lofty expectations." Jeff Friedman, co-chief executive of Mesa West Capital, Los Angeles, a non-recourse lender that has amassed a capital base of more than $1.5 billion to lend to troubled owners and borrowers, hit the same note, saying that "lofty expectations not based on reality" are the main reason commercial real estate finds itself in distress. Likening "too much leverage" to cancer, Friedman told the journalists, "When you start hearing 'new paradigm' or 'new new,' that's when you should start heading to the exits." David Steinwedell, co-managing partner of Stoneforge Advisors, Austin, said the current down cycle was unavoidable. "Commercial real estate is a business of seven-year cycles and five-year memories. And once the train gets going, it's hard to stop."

The 30-day or more past due rate on securitized multifamily mortgages rose 28 basis points in May to 13.34%-dashing hopes that delinquencies in that sector of the commercial real estate market had stabilized. Last month, Trepp LLC reported the multifamily 30-day plus delinquency rate fell 13 bps to 13.06%—the first decline since May 2009. However, one month does not make a trend. Commercial mortgage-backed securities delinquencies overall set yet another new record high as they jumped 40 basis points to 8.42% in May, according to Trepp. Trepp said the monthly increase in delinquencies has been between 37 and 49 basis points for seven out of the past eight months when the anomaly associated with New York's Stuyvesant Town in March is removed. The one exception outside of this was February, when delinquencies jumped just 22 bps. Serious delinquencies of 60-plus days—a category that also includes loans in foreclosure, real estate owned, and nonperforming balloons—increased 41 bps to 7.55% in the past month.

Just 10% of the re-REMIC deals Fitch has been presented with get rated in the wake of a number of restrictions it has put in place over the last year and ratings in the category are less volatile as a result of the move. As a result of these restrictions on rating resecuritizations of residential mortgage-backed securities in REMIC (real estate mortgage investment conduit) form, Fitch said it has been able to improve its rating stability but that there still is some downgrade risk in certain ratings in this category, particularly those it rated before tightening its criteria. So far the company said re-REMIC classes originally receiving its top rating of AAA in 2008 have since been downgraded below the speculative grade rating of B are limited to 20 ratings related to deals that deteriorated sharply in the wake of the Lehman bankruptcy and increased unemployment in late 2008, particularly in California and Florida. Of more than 1,800 re-REMIC classes rated AAA by Fitch since the beginning of 2008, more than 95% retain their original rating or were paid in full. Among re-REMIC limitations Fitch put in place over the past year due to current rating volatility concerns are prohibitions against rating re-REMICs backed by subprime or alt-A collateral of subordinate classes.

Increased use of credit default swaps and other more complex, synthetic financial instruments "really changed the nature of banking" in the mortgage-backed securities market and made it tougher to rate deals, a former managing director for a rating agency's derivatives unit told the Financial Crisis Inquiry Commission. Noting how at one point RMBS were increasingly packaged into collateralized debt obligations and structured investment vehicles, and pieces of CDOs were increasingly repackaged and sold into other CDOs, former Moody's Investors Service team managing director Eric Kolchinsky said analysts "did not anticipate that sort of investor" when originally rating deals. He told the commission during a hearing in New York Wednesday morning it was his impression that no analysts were consciously "wrong" about ratings and worked very hard on them, but at a certain point he felt he had no power or sufficient resources to make sure they were right. He said other challenges for analysts included pressure to rate deals quickly from bankers who wanted to minimize their warehouse risk.

CitiFinancial, the Baltimore-based consumer finance subsidiary of Citi Holdings, New York, has provided some details on how it is separating its business into two segments. One unit will include full service branches, focusing on originating and servicing personal, refinance and home equity loans. The other, CitiFinancial Servicing, will provide specialized service to customers who might benefit from expanded support, including a loan modification or restructuring. Once the reorganization is completed, new names will be picked for the divisions, likely by yearend. Over the past decade, Citi has been a major player in residential-based consumer finance, acquiring such brands as Commercial Credit, Associates Financial, and parts of the old Argent and Ameriquest brands.

Fannie Mae and Freddie Mac are rolling out the new short sales program that servicers must use for distressed borrowers who do not qualify for a permanent loan modification. "Once all other home retention options have been exhausted, eligible borrowers must be considered" for a short sale under the government's Home Affordable Foreclosure Alternative program, Freddie says in a new bulletin to servicers. Fannie/Freddie servicers are expected to have the HAFA short sales and deed-in-lieu program up and running by Aug. 1. The GSEs will pay servicers a $2,200 incentive for every completed HAFA short sale, and $1,500 for every deed-in-lieu of foreclosure transaction. Borrowers who become former homeowners will receive $3,000 for relocation costs for a successful short sale or DIL transaction. Also, incentives are being offered to investors for releasing borrowers from subordinated liens. The HAFA program brings more standardization to existing short sales programs. Freddie completed 9,600 short sales in the first quarter, compared to 3,100 a year ago. Fannie processed 17,000 short sales, compared to 6,000 in the first quarter of 2009. All servicers participating in the government's Home Affordable Modification Program are required to implement the HAFA program.

Bank of America said it will grant certain underwater homeowners principal reductions of up to 20% through a new wrinkle in its National Homeownership Retention Program. Only delinquent borrowers that received subprime or payment option ARM loans from Countrywide Home Loans are eligible for the principal forgiveness. B of A bought CHL almost two years ago, inheriting roughly $60 billion in problem loans. Jack Schakett, a credit loss mitigation executive at the bank, estimates that B of A will make 40,000 principal reduction offers under NHRP over the next few years. In response to a question from National Mortgage News, he said, "It's difficult to predict how many customers will take the offer." The Treasury Department is rolling out a similar initiative shortly with Fannie Mae and Freddie Mac expected to unveil their principal reduction program by the end of summer. Schakett said most investors have signed off on the initiative.

A Maine investment group has agreed to inject $60 million into Savings Bank of Maine, Gardiner, as part of the thrift's recapitalization plan. In March the $929 million-asset savings bank received a prompt-corrective-action directive from the Federal Deposit Insurance Corp., ordering it to become adequately capitalized by June 30, sell itself or merge with another institution. The $60 million investment from SMB Financial will boost the thrift's capital ratios above the required levels, the company said. Under the recapitalization plan, SMB also will absorb the thrift's two holding companies, restructure its debt and acquire all of its common stock. SMB Financial, also based in Gardiner and led by a group of local investors, is replacing several Savings Bank of Maine executives.