Servicing

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.

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.