Servicing

With more borrowers falling out of the Home Affordable Modification Program, short sales are finally gathering steam. Short sales have skyrocketed in the past two months after overtaking sales of real estate-owned in January, suggesting that the government's Home Affordable Foreclosure Alternatives program kick-started the short-sale market even before going into effect April 5. Roughly 28,000 REO sales were completed in March by seven of the top 10 mortgage servicers, nearly flat from 26,000 in February, according to data provided to American Banker by Equator LLC, a Los Angeles software firm. But 55,000 short sales were done in March, up from 29,500 in February, according to Equator. Christopher Saitta, Equator's chief executive, said it will take the market some time to absorb all the distressed properties, whether they are sold as REOs or in short sales. "I think it's going to take two to three years to get through everything the foreclosure moratoriums and the economy have created," Saitta said.

Capstead Mortgage Corp., a REIT that invests in GSE-backed MBS, is warning that higher prepayments will hit the market in the second and third quarters because of efforts by Fannie Mae to "buy out" delinquent loans from MBS pools. Capstead also believes that government-sponsored loan modifications will play a role in faster prepayment speeds on the securities it buys, possibly putting its earnings under some pressure. Capstead earned $40 million in the first quarter, a slight decline from the same period a year ago. Fannie began its buyouts of delinquent loans from MBS pools in March and will continue the effort in the coming months. By purchasing nonperforming loans out of pools, the GSE avoids forwarding those payments to the ultimate bondholder--a move that can save Fannie money but reduces the bond's yield to the investor. Capstead is publicly traded and monitors prepayments closely.

Even though PHH Corp.'s new CEO says his "transformation initiative" is working, the mortgage banker suffered an earnings decline and lower profit margins in the first quarter. The company had "core earnings" of $13 million in 1Q10 compared to $52 million for the same period in 2009. The performance was driven by a reduction in the mortgage profit margin to 118 basis points from 193 basis points. But CEO and president Jerry Selitto promised investors that PHH has seen the worst of the margin contraction and is confident margins will remain where they are for the rest of the year. The CEO also trumpeted the fact that while mortgage originations at PHH Mortgage fell 12% during the quarter (compared to 1Q09), many top originators suffered 1Q production declines of 30%. He noted that a new private-label client of PHH Mortgage, KeyBank, is adding $1.5 billion of production volume on an annualized basis. PHH's mortgage production unit posted a profit of $25 million, but its servicing division lost $13 million.

Late payments on Freddie Mac-guaranteed mortgages fell to 4.17% in March, the first monthly decline in almost two years and a sign that real estate conditions might finally be improving. A spokesman for the GSE told National Mortgage News that an "uptick in completed loan modifications" and rising short sales were the chief reasons for the improvement. Delinquencies on Freddie's book of business declined 7 basis points from February. A year ago late payments totaled a more benign 2.41%. Even though loan performance improved, secondary market purchases by Freddie from seller/servicers increased slightly to $31 billion in March from February. However, compared to March 2009, loan acquisitions fell by 64%. Based on the first-quarter run-rate, Freddie will buy $384 billion this year compared to $548 billion the year before.

When the Information Solutions Group of First American Corp. becomes a separately traded public company, it will take the name CoreLogic and trade on the New York Stock Exchange under the symbol CLGX. The spin-off is targeted for June 1. The title company will be part of First American Financial Group, which will retain the FAF ticker symbol. The new CoreLogic will encompass more than 20 different business lines, making it larger and more diverse than the entity currently known as First American CoreLogic. Meanwhile, two sets of First American bondholders have approved debt tender offers and consent solicitations. The approvals by those who hold the 5.7% senior notes due 2014 and the 8.5% capital securities due 2012 expressly affirm the spin-off transaction. A third solicitation for the holders of the 7.55% senior debentures due 2028 remains in progress, with 43% tendered so far.

African-American and Hispanic homeowners are more likely to face foreclosure than their white counterparts, according to a study by National Community Reinvestment Coalition. Minority borrowers in the Washington D.C. metropolitan area are "facing foreclosures more often than white borrowers even after controlling for borrower, loan and neighborhood characteristics," the researchers concluded. They also noted that "income has almost no statistical significance" in explaining the likelihood of foreclosure. Hispanic homeowners are almost twice as likely to face foreclosure and African-Americans are 1.18 times more likely than whites to face foreclosure. A recent survey by NCRC discovered that African-American borrowers in loan modification programs went to foreclosure faster than whites. Further research is needed, the study says, to determine if servicers "act more quickly to foreclose" on minority borrowers. The Department of Justice's fair lending unit is said to be reviewing loan modification data provided by servicers participating in the government's Home Affordable Modification Program.

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.