Servicing

Distressed properties are selling at prices 15% below other home sales, according to a March survey by the National Association of Realtors. Last year the discount on foreclosure and short sales was normally 20%. But Realtors say they are receiving multiple bids from investors on single-family homes priced at $150,000 and lower. They also are complaining that banks won't release their inventory. The Realtor survey shows that foreclosure sales comprised 24% of existing home sales in March and short sales comprised 12% of sales. Realtors also reported that 11% of sales contracts were canceled in the first quarter as a result of low appraisals. Realtors also noted that sales were delayed or renegotiated because of low appraisals. "The appraisal process continued to draw a significant number of negative comments, particularly as related to selection of comps, the competency of appraisers, and lags between the actual market and appraised values," said Jed Smith, NAR managing director of quantitative research.

Moody's Investors Service's has downgraded $35 billion of synthetic jumbo residential mortgage-backed securities issued between 2005 and 2007 due to recent updated loss expectations for jumbo loans originated between 2005 and 2008. Moody's has downgraded ratings on nine tranches issued by Armor MCP 2005-1 LP, four tranches issued by EASI Finance Limited Partnership 2007-1, 11 tranches from SASI Finance Limited Partnership 2006-A, 81 tranches from nine deals issued by RESI Finance Limited Partnership, and 12 tranches from five deals issued by RESIX Finance Limited Credit-Linked Notes. Prime jumbo synthetic transactions provide the owner of a sizable pool of mortgages with credit protection through a credit default swap with the issuer of the notes. Through this agreement, the protection buyer or owner of the loan pool pays a fee to the issuer or protection seller in return for the transfer of a portion of the reference portfolio credit risk. The reference portfolios of these transactions include prime conforming and nonconforming fixed-rate and adjustable-rate mortgages purchased from various originators, according to Moody's.

Escalating troubles at Ambac Assurance Corp. and the resulting inability of the bond insurer to make even less of a partial payment on claims than it previously expected caused U.S. Central Federal Credit Union to restate its fourth quarter results for 2009, adding $274 million in losses that came from MBS investments. As a result, U.S. Central had losses of $750.9 million for the fourth quarter and $2.04 billion for the full year. U.S. Central, which has been run under a National Credit Union Administration's conservatorship program since March 2009, had a loss of $4.9 billion for 2008. Financial troubles at Ambac caused its regulator, the Wisconsin Insurance Commissioner, to issue an order restricting the company's activities and its ability to pay bond claims. As a result, U.S. Central now projects it will collect 25% of its claims from Ambac, down from earlier projections of 80%. This increased U.S. Central's estimates for credit losses on Ambac-backed bonds to $416.1 million. Ambac is one of several troubled bond insurers whose financial troubles are trickling down to customers like the corporate credit unions, with other corporates cutting their recovery estimates in recent months on bonds insured by MBIA, Financial Guarantee Insurance Corp., Syncora Guarantee and FSA (now Assured Guarantee Municipal). Both FGIC and Syncora have been ordered by the New York Insurance Department to stop paying claims in order to preserve what little capital they have.

A relatively weak quarter for Flagstar Bancorp's mortgage business contributed to the Troy, Mich., company's nearly $82 million loss in the first quarter of 2010. For the same period in 2009, the company lost over $67 million and in the fourth quarter of 2009, it lost approximately $72 million. Gain on loan sales fell from $96.5 million in the fourth quarter of last year to $52.6 million in the most recent period. This reflects a decline in interest rate locks on mortgage loans, from $7.9 billion in the fourth quarter of 2009 to $6.1 billion for the first quarter of 2010 as well as a decline in residential mortgage sales during the same period from $7.1 billion down to $5.0 billion and a decline in loan fees from mortgages from $27.8 million down to $16.3 million. Loan originations fell from $9.5 billion in the first quarter last year to $6.9 billion in the fourth quarter to $4.3 billion in the most recent period. Its servicing portfolio declined from $56.5 billion at the end of last year to $48.3 billion on March 31, 2010. During the first quarter, Flagstar had two bulk servicing sales totaling nearly $11 billion. Nonperforming residential first mortgage loans were $709.4 million at the end of the first quarter, up from $659.5 million as of Dec. 31, 2009, while nonperforming commercial mortgages increased to $395.8 million from $385.7 million during the same period.

With home prices stabilizing, the market may soon be flooded with new listings from sellers that have been waiting for such an improvement, according to the Mortgage Bankers Association. "There will be a flood of listings," predicted MBA vice president of research Michael Frantantoni. "We will have a rather volatile, sort of topsy-turvy market for the next couple of years." Speaking at an MBA trade show, Frantantoni noted that both owner (2.6%) and rental vacancy rates (10.6%) are increasing. He said this trend suggests "we are losing households." MBA anticipates that home prices will be flat for the rest of the year. The trade group anticipates that the Federal Reserve will not start hiking short-term rates until December of this year, at the earliest. But Frantantoni fears that even with the economy improving, consumers may not spend much. "Their outlook on spending, saving and risk taking may have changed," he told the audience. As for the job market, MBA sees unemployment falling steadily to 7.5% by 2012, but a large portion of that improvement may come in the hiring of temporary workers, he said. "Roughly one-quarter to one-third of this audience is hiring temps," Frantantoni said. "We're not anywhere close to a peak. Businesses are seeing an increase in demand for their services and they need to staff up as a result, or plug the hole while they wait to see if this demand will persist."

The House of Representatives Tuesday afternoon passed a bill that reforms the Rural Housing Service's single-family program, extending it through Sept. 30 to prevent a shutdown. Supporters of the bill (H.R. 5017) hope the Senate acts quickly to approve the measure this week. The chief sponsor of the legislation, Rep. Paul Kanjorski, D-Pa., said RHS could run out of loan guarantee authority by the end of April. The bill makes RHS self-funding by increasing the upfront guarantee fee to 4% from the current 2% requirement. The Agriculture Department, which administers the program, is expected to impose a 3.44% fee on borrowers. The original bill allowed the Agriculture secretary to assess a 0.5% annual fee on the loan balance, but the measure was dropped during a committee markup. Congress originally granted RHS $13.1 billion for loan guarantee authority for fiscal 2010, but thanks to the program's popularity, the allocation is nearly gone. The bill increases that authority to $30 billion, but it expires Sept. 30 when the fiscal year ends. Congress will have to renew RHS's loan guarantee authority as part of the FY 2011 appropriations process. Rep. Shelley Moore Capito, R-W.Va., said the short-term extension is needed to foster a return of private lenders.

Freddie Mac is seeing more REO property-flip fraud cases in which investors recruit people to pool money in an LLC and purchase bank-owned properties for cash, according to Martin Abad, associate director, Freddie Mac. "The logic behind it is that if you submit a cash offer, it's more likely to get approval from the bank, get a better deal and close quickly," Abad said at the Mortgage Bankers Association's National Fraud Issues Conference in Chicago. Property theft is a new type of fraud, he told attendees at the general session on "Mortgage Fraud and the Secondary Market." When a lender or Fannie or Freddie takes a property back at REO, there are people who will record fake rent deeds and transfer title from the banks or GSE to an LLC, he said. "There is an online recording service where you can pay a fee and record any document you want. You don't have to go to the county recorder's office." In an active case he is currently working on, Abad said the fraudster listed the properties for rent on Craigslist and is now attempting to sell some of these properties. Half of the loans involved in Freddie Mac's fraud cases involved non-owner-occupied properties. What had been loan modification fraud is turning into short sale fraud, because scammers can make more money in a shorter period of time with the latter, he said. In 2009, short sale activity at Freddie Mac increased by 250% from the previous year. In the first three months of 2010, it has increased 65%.

A Republican alternative to Sen. Chris Dodd's massive financial services bill gives the mortgage banking industry hope that Congress understands the dire need for an exemption on MBS risk retention. According to an outline prepared by Sen. Richard Shelby's staff, an exemption on the 5% risk retention rule would be granted for loans that "meet minimum underwriting standards" established by bank regulators. However, no details are provided in the outline. All factions of the mortgage industry are lobbying furiously for a risk retention exception for issuers of bonds backed by Fannie Mae, Freddie Mac, and FHA loans. Language in the Shelby outline regarding risk retention is more specific than what is in the Dodd bill. However, lobbyists say Dodd has been open to more specific language on risk retention. Some industry participations believe that if no "carve out" is granted, a new round of consolidation will result in large players having even more control over the industry than they do now.

For failed-bank bidders, the end of the sweetheart deal may be at hand. During the financial crisis, the Federal Deposit Insurance Corp. has routinely guaranteed 80% of the potential losses on assets at scores of failed banks, a bargain for those trying to enter or expand their reach in the banking market. But in one of its most recent deals-TD Bank's purchase of three Florida banks on April 16-the FDIC agreed to cover only half the losses, a significantly less generous arrangement. Though an 80% guarantee is likely to remain the norm in the near term, the FDIC is expected to do more deals like the one with TD Bank. "We would expect that as the market continues to improve the terms of the loss-share transactions will change and that the amount of risk an acquirer will be willing to assume will increase," said James Wigand, deputy director in the FDIC's division of resolutions and receiverships.

Fannie Mae has extended its seller assistance incentive on all company-owned HomePath properties. Buyers will receive 3.5% of the final sales price to be used toward closing cost assistance or their choice of selected appliances. The offer is available to any owner/occupant who closes on the purchase of a property listed on www.HomePath.com by June 30. "We are happy with the results of the program, which has helped us to sell properties quickly, thereby stabilizing neighborhoods and property values," said Terry Edwards, Fannie Mae executive vice president of credit portfolio management.