Servicing

A quarterly survey by two Chicago professors shows a dramatic increase in the number of "strategic defaults" where an underwater homeowner willingly defaults on his mortgage even though he can afford to make the payments. An estimated 31% of foreclosures involved strategic defaults in March, compared to 22% a year ago, according to the Chicago Booth/Kellogg School Financial Trust Index. The survey is conducted by professors Paolo Sapienza of the Kellogg School of Management, and Luigi Zingales of the University of Chicago Booth School of Business. They said the likelihood of strategic default increases by 23% if a homeowner discovers that a neighbor with negative equity received loan forgiveness from their servicer. The likelihood increases to 29% if homeowners can find alternative financing for a new home. The survey found that 56% of homeowners do not believe that lenders will come after them if they walk away from their home. "With more and more homeowners believing that lenders are failing to pursue those who default on their mortgage, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford the payments," Sapienza said.

Fannie Mae has set new standards for purchasing and securitizing adjustable-rate mortgage products with the aim of ensuring consumers who hold them can sustain their payments beyond the loans' initial interest rate periods. The new standards require ARMs with initial interest rate periods of five years or less to be qualified at the greater of the note rate plus 2% or the fully indexed rate (index plus margin). In addition, qualification criteria for interest-only loans will change such that the maximum loan-to-value ratio cannot exceed 70%, the borrower's credit score must be 720 or higher and the borrower must have a minimum of 24 months of liquid asset reserves remaining after closing. Balloon loans, which generally are characterized by lower initial interest rates and a significant balance due at maturity, will no longer be eligible unless they receive special approval. All loans not meeting the new guidelines have to be purchased as whole loans on or before Aug. 31 or delivered into mortgage-backed securities pools with issue dates on or before Aug. 1.

For the second consecutive month, members of the Mortgage Insurance Cos. of America reported more primary insurance cures than defaults for March 2010. Mortgage insurers had 77,909 cures and 63,126 defaults for a ratio of 123.4%. This compares with 80,758 cures and 68,675 defaults in February for a ratio of 117.6% and 69,931 cures and 84,042 defaults for a ratio of 83.2% in March 2009. March was also the best month of the first quarter 2010 in terms of both applications received and dollar volume of primary new insurance written. Including policies written for loans refinanced in the HARP program, MICA members had $4.5 billion written in the traditional channel and $400,000 in the bulk channel, vs. $3.6 billion total in February and $9.8 billion in the traditional channel and $9.7 million in the bulk channel in March 2009. Primary insurance in force continues to decline, going from $844.4 billion in February to $828.6 billion in March. There was $1.8 million of new pool risk written in March; total pool risk in force at the end of the first quarter was $7.4 billion.

Federal Housing Administration veteran Meg Burns has departed HUD to manage the Federal Housing Finance Agency's newly restructured Office of Congressional Affairs and Communications. A career FHA official, Burns was senior advisor to former FHA commissioner Brian Montgomery and was generally considered the second in command there. The new FHA commissioner brought in Vicki Bott, a Wells Fargo Home Loan executive, to fill that role. On May 10, Burns will join FHFA, as the senior associate director for congressional affairs and communications. FHFA oversees Fannie Mae, Freddie Mac and the Federal Home Loan Banks-which Congress will move to restructure next year. Peter Brereton will continue to be responsible for congressional affairs and Mary Ellen Taylor will be responsible for interagency relations and media communications. During her career at the Department of Housing and Urban Development, Burns worked at the former HUD Office of GSE Oversight.

After several quarters of horrendous losses, GMAC's residential mortgage division posted a small profit in the first quarter, attributing the turnaround to improved servicing revenue and lower loan losses and buyback costs. Residential Capital Corp., the nation's fourth largest funder of home mortgages, earned $110 million compared to a loss of almost $1 billion in the same period a year ago. The mortgage division is continuing to dispose of delinquent assets, though like most sellers, is not revealing much information about the buyers of such loans. During a conference call on Monday the company said it is contemplating an initial public offering to help the car and home lender repay some of its $17.3 billion of federal bailout funds. GMAC chief executive, Michael Carpenter, said he plans to meet with Treasury Department officials Tuesday to discuss several matters "which may well include an IPO [to] allow us to repay [the] Treasury in a reasonable period of time." The government has a 56% stake in GMAC. ResCap originated $13.3 billion of home mortgages during 1Q, a 26% decline from 4Q. Compared to 1Q 09, production was relatively flat. GMAC has retained Goldman Sachs & Co. as its advisor.

The completion of the PMI Group Inc.'s sale of common stock and senior notes has contributed enough proceeds to bring the Walnut Creek, Calif.-based company's primary mortgage insurance underwriter back into compliance with the risk-to-capital ratio and minimum policyholders' position requirements some states have. The transactions netted $706 million, of which $586 million went to PMI Mortgage Insurance Co. This had the effect of reducing the company's risk-to-capital ratio on a pro forma basis as of March 31 to 13.4:1. In its first quarter earnings release, the company gave a preliminary risk-to-capital ratio figure of 26.6:1 for the subsidiary, above the 25:1 requirement a number of states have. However because the capital raise took place after that date, this is not being reflected in PMI Mortgage Insurance Co.'s balance sheet, policyholders' position or risk-to-capital ratio for the first quarter statutory filing. Steve Smith, chairman and chief executive noted that this means the PMI Mortgage Insurance Co. is able to continue writing new policies in all 50 states and the company won't have to turn to a reactivated subsidiary to write policies in states with a risk-to-capital or related requirement.

PennyMac Mortgage Investment Trust, a vulture fund that invests in troubled mortgage assets, will release its first-quarter results on Tuesday morning before the opening of the stock market. Since going public almost a year ago the company has yet to turn a profit but has reviewed billions of dollars in delinquent loans for possible purchase. The company is also working on launching a new lending conduit and could be eyeing the jumbo market.

Even though servicers are improving their "cure rates" the housing market is still saddled with 7.4 million delinquent loans, according to a new report from Lender Processing Services. In its latest Mortgage Monitor update, LPS said Florida, Nevada, New Jersey, Arizona, California, Illinois, Indiana and Ohio showed foreclosure inventories at a higher percentage than the average national foreclosure rate of 3.27%. The total U.S. loan delinquency rate was 9.12%. The number of noncurrent loans has declined over the past six months, but 16 states showed an increase in the number of noncurrent loans. The figures represent a snapshot of the market at March 31. Total delinquencies, excluding foreclosures, decreased 10.3% from February to March. However, the total represents a year-over-year increase of 15.7%. States with the most noncurrent loans include Florida, Nevada, Mississippi, Arizona, Georgia, California, Illinois, Rhode Island, New Jersey and Michigan.

Buoyed by lower delinquencies, the mortgage insurance division of Genworth Financial lost $36 million in the first quarter, a major improvement from prior periods and a sign that the unit could be on the road to recovery. Genworth reported "increased cures" on its book of business which totals about $130 billion in residential coverage. According to a research note from Sandler O'Neill, the MI unit's results "were driven by a better-than-expected loss ratio of 138% compared to our expectation for 170%. Loan loss mitigation activities resulted in $233 million of savings compared, a little less than our expectation for $250 million. The lower loss ratio and lower loss mitigation levels suggest that the underlying book of business is performing better than we expected." According to figures compiled by National Mortgage News, Genworth ranks fourth in terms of policies-in-force and about the same in new business written. In the first quarter Genworth made a number of changes to its underwriting guidelines, including coverage on higher LTV loans in once-troubled real estate markets. In the fourth quarter Genworth's MI unit lost $74 million. In 1Q09 it lost $135 million. All of Genworth--which includes other insurance divisions--earned $178 million, compared to a loss of $469 million in the same period a year ago.

Wells Fargo Securities said it has expanded its residential mortgage-backed securities unit that previously had limited structuring and distribution capabilities. WFS has been working on expanding the RMBS unit since early this year. The unit is now fully staffed, providing advisory, structuring, research, distribution and trading services to lenders and investors as well as to its own Wells Fargo Home Mortgage unit. Mike Buttner, who previously managed the hedging of Wells Fargo Home Mortgage's servicing rights, loan pipeline and warehouse assets, heads the RMBS unit. In addition to Buttner, key senior executives include Doug Lucas, head of mortgage trading. Lucas most recently ran structured products trading in London for Bear Stearns. Dash Robinson heads residential mortgage finance structuring and lending. Robinson was previously responsible for the execution surveillance and restructuring oversight of Wells Fargo's structured finance transactions.