Servicing

By mid-week issuers and rating agencies must comply with a Securities and Exchange Commission rule designed to encourage more unsolicited opinions on asset-backed securities. The regulator wants to remove the conflicts of interest in the ratings process that led to inflated ratings in the past and contributed to the financial crisis. Among the new requirements, when a firm is hired to rate an asset-backed security, it must notify rivals that did not get the job. The arranger of a security must give all raters - even those it has not tapped - detailed information on the underlying loans, something that previously only the agencies that got the assignment could see. And the agencies will have to rate at least 10% of all deals they inspect, whether or not they are paid to rate them. Government-sanctioned kibitzing could complicate the gradual recovery in the asset-backed market that began last year. "Issuers are not really crazy about getting unsolicited ratings that are going to be lower ones than they obtain," said Steve Kudenholdt, partner and co-chair of the capital markets practice at Sonnenschein Nath & Rosenthal LLP. For one thing, the new requirements may prolong the time it takes to bring deals to market. "It's definitely going to slow things up," said Michael Buttner, Wells Fargo & Co.'s head of residential mortgage-backed securities. "Until you've got all the rules laid out and have worked it through a few times, it's new and it's not going to be as smooth."

Barclays Bank PLC has agreed to sell HomEq, a specialty servicer, to a division of Ocwen Financial for roughly $1.3 billion. Under terms of the agreement, Ocwen Loan Servicing LLC would pay for the U.S. mortgage servicing business in cash at the completion of the deal, with the amount subject to an "adjustment mechanism." The mechanism is based on the unpaid principal balance of HomEq's servicing portfolio and the value of certain other assets at the completion of the transaction, according to Barclays. HomEq's servicing portfolio had a UPB of $28 billion at the end of March. The division is based in North Highlands, Calif., and was once owned by Wachovia Corp., which sold it to Barclays four years ago for $470 million, a year before the subprime meltdown began. It also has connections to the Money Store, a well-known subprime lender. The British-based Barclays said it expects the transaction to close in the third quarter, subject to customary conditions that include competition clearance and regulatory approval. The publicly traded Ocwen Financial is based in West Palm Beach, Fla.

It's no secret that the GSEs have been demanding billions of dollars in loan buybacks over the past year, but now Freddie Mac is warning that some of its seller/servicers may not meet their repurchase obligations. "Some of our seller/servicers failed to perform their repurchase obligations due to lack of financial capacity, while many of our larger seller/servicers have not fully performed their repurchase obligations," the GSE says in a public filing. As of March 31, Freddie had $4.8 billion in outstanding buyback requests pending. Roughly 34% of those requests were outstanding more than 90 days. The secondary market agency warned that its credit losses may increase if customers do not fulfill their buyback obligations. Freddie executives also are concerned that collection efforts could "negatively impact" their relationships with seller/servicers who have the financial capacity to perform buybacks but chafe at such requests for one reason or another. In the first quarter, seller/servicers reimbursed Freddie $1.3 billion for breaches of representations and warranties, compared to $789 million in the same period in 2009. Fannie Mae reported $1.8 billion of buybacks in the first quarter, compared to $1.1 billion a year ago. Fannie expects its buyback requests will remain high for the rest of this year.

For the third consecutive month, the private mortgage insurance industry reported that its member firms had more new cures than defaults, a sign, perhaps, that the delinquency picture is improving in a sustainable way. According to figures compiled by the Mortgage Insurance Companies of America, insurers had 66,170 cures and 60,656 defaults in April for a cure/default ratio of 109%. In March, the ratio was 123% and in February the reading was 118%. For the fourth consecutive month, the number of applications for new policies increased. Also, for the third consecutive month the dollar volume of primary new insurance written increased. However, both figures are down considerably from a year ago. In April, the nation's seven MI firms wrote $4.8 billion of primary new insurance compared to $4.5 billion in March, and $7.8 billion in April 2009. Since July 2009, MICA has included loans originated through the Home Affordable Refinance Program in its findings. MI firms received 29,948 applications in April, compared to 28,720 in March and 60,947 in April 2009. The number of applications received in April is the most since November 2009, and likely is tied to two federal tax credits expiring. However, the amount of primary insurance-in-force continues to decline: $812 billion compared to $932 billion a year ago.

Fannie Mae, Freddie Mac and GNMA had a combined "purchase" market share of 98% in the first quarter, according to new figures compiled by National Mortgage News. The share number represents a slight decline from the near monopoly (99%) they had on the business last year. NMN derived its market share numbers by taking the loan purchases of the GSEs (and the bond issue of GNMA, which reflects FHA/VA production) and dividing it by industry-wide originations in a given time frame. It's no secret to seller/servicers that these three entities dominate the secondary market, setting loan standards for 60 million borrowers. The numbers also indicate that very few lenders actually keep whole loans on their balance sheets except for jumbo mortgages, and, perhaps, conventional ARMs. Ten years ago Fannie and Freddie had a combined purchase market share of about 50% with GNMA at a meager 5%. (For the full story see this week's paper edition of NMN.)

Barclays Bank PLC has agreed to sell HomEq, a specialty servicer, to a division of Ocwen Financial for roughly $1.3 billion. Under terms of the agreement, Ocwen Loan Servicing LLC would pay for the U.S. mortgage servicing business in cash at the completion of the deal, with the amount subject to an "adjustment mechanism." The mechanism is based on the unpaid principal balance of HomEq's servicing portfolio and the value of certain other assets at the completion of the transaction, according to Barclays. HomEq's servicing portfolio had a UPB of $28 billion at the end of March. The division is based in North Highlands, Calif., and was once owned by Wachovia Corp., which sold it to Barclays four years ago for $470 million, a year before the subprime meltdown began. The British-based Barclays said it expects the transaction to close in the third quarter, subject to customary conditions that include competition clearance and regulatory approval. The publicly traded Ocwen Financial is based in West Palm Beach, Fla.

Fidelity National Information Services' board this week authorized a $2.5 billion stock repurchase program, offering to buy back its common for between $29 and $31 each. The stock has risen more than 40% this year. The firm, a top vendor to the mortgage industry, now has a market capitalization of roughly $9.8 billion. The news about the stock split comes a week after a leveraged buyout of the company fell apart. Last month, FIS reported that its 1Q profit nearly tripled, thanks to a big jump in processing and service revenue.

The Prestwick Mortgage Group of Virginia will auction off a $19 million package of residential servicing rights tied to Fannie Mae loans. The average loan size is $119,228 with the average note rate at 6.02%. All but one of the loans are on properties in Florida. The package has a delinquency rate of 3.7%. The bid deadline is June 9.

The condition and performance of half the Federal Home Loan Bank system is "less than adequate," according to the nation's government-sponsored enterprise regulator. Federal Housing Finance Agency acting director Edward DeMarco, who cited continuing losses on investments in private-label mortgage-backed securities at six regional GSEs, told a congressional panel that he wants to see a gradual reduction in the FHLBs' investment portfolios. "FHFA is looking for the FHLBs to return to more traditional operations and activities with a focus on advances," DeMarco said. He stressed that the FHLBs have never experienced losses on making advances to their members. The GSE regulator did not mention mortgage purchase programs that several FHLBs engaged in, which caused financial problems at the Seattle and Chicago banks. Separately, FHFA issued a proposed rule to establish affordable housing goals for the mortgage purchase programs. The comment period ends in 45 days.

Investor loans guaranteed by Freddie Mac fell to just 3% of portfolio outstandings in the first quarter, the lowest reading in almost seven years, according to new company figures. In 2007, roughly 7% of Freddie's guarantees were on non-owner occupied homes, a GSE spokesman told National Mortgage News. Investor loans, in general, can differ from "pure" vacation or second homes, in that the owner is trying to cover his payments (full or in part) by renting out the property. Some owners of vacation homes do not rent out the house at all and instead can afford the monthly payments without the help of rent rolls. During the housing boom, some lenders provided low downpayment financing for investor properties and vacation homes but since the market crash of 2008, most mortgage bankers want at least 20% down or more, depending on where the home is located.