Servicing

The Senate Thursday evening approved by unanimous consent an amendment that will exempt "qualified mortgages" from the 5% risk retention provisions in the Wall Street reform bill. As approved, the language will ensure the 5% risk retention provision does not obstruct the securitization of the safest mortgages: loans that generally have 20% down payments or carry mortgage insurance. The amendment, sponsored by Senators Mary Landrieu, D-La., Johnny Isakson, R-Ga., and Kay Hagan, D-N.C., instructs federal regulators to exempt low risk, fully documented loans from risk retention. "We commend the Senate for the passage of the Landrieu/Hagan/Isakson amendment that exempts soundly underwritten, stable, consumer friendly mortgages from the risk retention requirements," said Glen Corso, managing director of the Community Mortgage Banking Project. Sen. Isakson supported the qualified mortgage exemption after his effort to strike the risk retention provision from the bill failed. "Risk retention is not the cure-all for good lending-underwriting is," the Georgia lawmaker said. Sen. Landrieu noted the amendment will ensure that applicants with good credit who finance their home the "old fashioned way" will not face higher interest rates due to risk retention. At the same time, the 5% risk retention provision will "eliminate the risk taking we saw in the home mortgage market between 2004 and 2007," Landrieu said.

A new report issued by the National Credit Union Administration on last year's failure of Eastern Financial Florida Credit Union of Florida found that the one-time high-flying CU was brought down by risky investments in derivatives known as collateralized debt obligations, or CDOs, as well as loan losses and other concerns. "Eastern Financial suffered substantial losses in the CDO investments during 2007 and 2008 that, coupled with increasing loan losses and other contributing operating factors, quickly eroded the credit union's net worth and led to its insolvency," said the report, conducted by NCUA's Office of Inspector General. At one time, EFFCU boasted $2.4 billion in assets. To date, its failure is the largest in CU history, according to The Credit Union Journal. The nonprofit was chartered in 1937 to serve employees of Eastern Airlines. Eventually it was acquired in a supervisory merger by Space Coast Credit Union. NCUA says as Eastern's profitability lagged its asset growth, management and the board approved a leverage strategy allowing it to invest in risky investments-specifically CDOs.

While there was some good news in the first quarter results for Triad Guaranty Inc., its deficit in assets related to the runoff of its mortgage insurance business increased to nearly $733 million as of March 31. Ken Jones, president and chief executive, explained this means to meet all of its existing obligations, Triad would have to earn an equal amount during the remaining run-off period. The company had a net loss of $28 million for the first quarter 2010, an improvement over losses of $79 million for the fourth quarter 2009 and $55 million in the first quarter 2009. Jones said Triad's cure rates increased in the first quarter for the first time since the first quarter 2009, attributing it to improved results from the government's loan modification efforts. He added that the first quarter of a year normally sees an improvement in the cure rate, and thus right now "we are unable to determine whether the lower first notices of default and the improved cure rates experienced during the quarter reflect typical seasonality, or whether they mark the beginning of a recovery in the U.S. mortgage and housing markets."

Indicating growing investor interest in commercial deals, bidders rushed to a U.S. Department of Housing and Urban Development auction of $306 million in non-performing multifamily and healthcare HUD loans that generated proceeds equal to almost half their unpaid balance, according to loan sale advisor KDX Ventures. KDX said 67 bidders submitted over 200 individual and pool bids for the 26 assets offered for sale in April. Executives said the 12 winning bids submitted on individual assets generated proceeds of over 48% of unpaid principal balance demonstrating "the pent-up demand and liquidity for commercial real estate assets." According to DebtX CEO Kingsley Greenland, even though over the past two years, investors have amassed a tremendous amount of capital to invest in commercial real estate loans, "there has been only a small amount of product available for sale." KDX is a joint venture between boutique investment banking firm KEMA Advisors, Hillsborough, NC, and international online marketplace, DebtX, Boston.

The delinquency rate on loans backing U.S commercial mortgage-backed securities jumped 60 basis points in April to 7.02%, according to Moody's Investors Service. This increase was the second highest in the history of Moody's Delinquency Tracker, surpassed only by the tracker's 69 bp jump the previous month. The tracker follows the history of all U.S. conduit/fusion deals issued in 1998 or later that still have an outstanding balance.

U.S. subprime prices outside of the notorious 2007 vintage continued to show notable signs of a significant rebound in the latest month, according to a Fitch credit default swap index. Overall, the Fitch Subprime Total Market Price index showed a 7% month-to-month increase to 8.71% as of May 1. The 2007 vintage is still down 9% on the year, but since Jan. 1 the 2005 and 2006 vintages have gained by 36% and 22%, respectively.

A recent Fitch Ratings study of securitized non-agency mortgages in California shows high delinquency rates triggered by the level of negative equity can produce "dramatic differences" in local loan performance. The study found that California's 60-plus day delinquency rates for prime loans are at 12%, compared to 10% nationally; for option ARM loans it was 47% compared to 46% nationally, and for subprime loans it was 50% compared to 47% nationally. While mortgage performance in the state "is not substantially different" from the rest of the country, regions with the largest home price increases have also seen "the most precipitous declines," Fitch said. The disparity between various regions within the state's 382 metropolitan statistical areas tracked by Fitch is so great that California is home to both the best performing region in the country (San Francisco-San Mateo-Redwood City in San Francisco) and some of the country's worst performing markets. For example, in Riverdale 90% of the mortgages are now "under water" and 60% of borrowers owe over 150% of the value of their home. Also, in Riverside the prime 60-plus day delinquency rate is 23% or five times higher than the 4% rate in San Francisco. The pattern is consistent among all loan types, including nonprime, option ARM and Alt-A loans, according to Fitch.

Standard & Poor's has revised its criteria for certain federal government-enhanced housing bonds. This could affect the ratings of bond issues that are secured by mortgages that are insured or guaranteed by Fannie Mae, Freddie Mac, Ginnie Mae or FHA if the bonds are reliant on investment earnings for full and timely payment. Specifically, it could affect "the ratings on issues that rely on market rate investment earnings to meet debt service payments for the term of the bonds...unless cash flows have been previously analyzed based on a zero rate of earnings," S&P said. S&P has placed a total of 632 issues on CreditWatch with negative implications as a result.

Ginnie Mae guaranteed more than $32.6 billion in mortgage-backed securities in April. Ginnie Mae II single-family pools totaled more than $18.9 billion and Ginnie Mae I single-family pools were $12.6 billion. Ginnie Mae's multifamily MBS issuance was over $1 billion, marking the second time during fiscal year 2010 that multifamily issuance crossed the $1 billion threshold. March numbers for 90-plus day delinquencies released with the April issuance figures showed late payments of this type dropped to 1.85% from 2.02% in February.

Nonbank lender Universal Mortgage of Wisconsin is closing down after failing to find a private equity investor willing to pump capital into the $4 billion servicer. In an interview with National Mortgage News, company president Ron Huiras confirmed that a "sale did not go through," adding that, "We'll be winding down the operation." He said the nonbank was hurt by loan buyback requests from secondary market investors. "Buybacks were part of the problem, absolutely," he said. He declined to elaborate further. Investment banking sources said at one time Phoenix Capital of Denver was shopping around the company and/or its servicing portfolio. At press time Phoenix had not returned a telephone call about the matter. Mr. Huiras has had a long career in mortgage banking, including a stint as a top executive at Fleet Mortgage. The company is hoping to place some of its workforce at other shops, said one source. "It's a shame," said this source. "They were a good shop. Some of these buybacks were on loans that were two and three years old. And some of these loans weren't even delinquent."