Servicing

The Federal Deposit Insurance Corp. on Tuesday revamped its securitization proposal, mandating that depositories hold a 5% risk retention piece, but exempting loans sold to the GSEs and into bonds guaranteed by the Government National Mortgage Association. The initial proposal issued in November required banks to season single-family loans for 12 months before securitization. As a result of industry comments, FDIC dropped the seasoning requirement and is now proposing that banks issuing residential MBS maintain a 5% reserve fund for one year to cover early defaults and breaches of representations and warranties. The new proposal, which will be published for a 45-day comment period, requires bank issuers to retain 5% of each MBS tranche. The FDIC proposal is designed to update the agency's policies on the treatment of commercial and residential MBS when the issuing bank fails. It is also designed to address problems that arose in the subprime market, placing additional requirements on residential MBS issuers, including disclosures by the servicing bank if they own the second liens on the loans being serviced. "We want the securitization to come back the right way, not the wrong way," said FDIC chairman Sheila Bair. Agency officials noted that their measure is similar to a Securities and Exchange Commission proposal that also imposes 5% risk retention on bank and nonbank MBS issuers. Chairman Bair said the SEC proposal, when finalized, will become the "base" for banks. The FDIC board of directors approved the securitization proposal for public comment by a 3-2 vote. Comptroller of the Currency John Dugan and the Office of Thrift Supervision acting director John Bowman voted against the proposal.

Redwood Trust Inc., which recently came to market with a jumbo MBS deal, is already working on a follow-up bond offering, according to industry officials familiar with the matter. The publicly traded REIT had no comment on its plans. One investor noted that "they already have the loans in place." And a source close to the firm noted that the Mill Valley, Calif., company "is interested in creating more credit pieces or subs to own or invest in." Last month Redwood securitized $238 million of jumbo prime residential mortgage loans through its Sequoia securitization program. It was the first non-government sponsored residential jumbo bond issued in almost two years. Many of the loans collateralizing the security came from CitiMortgage. (Citi's parent firm was one of the bond's underwriters.) Meanwhile, Redwood on Monday launched a flow purchase program where it will acquire prime residential mortgage loans from "banking companies and other selected originators." It noted that the effort "is currently operating with a small number of mortgage loan originators that have national platforms."

Commercial mortgage lender and servicer Red Capital Group, Columbus, Ohio, has been sold by PNC Bank NA to an investor group led by Orix USA Corp., Dallas, a subsidiary of Japan's Orix Corp. Among the members of the investment group is Stonehenge Partners, Columbus. Terms of the transaction were not disclosed. Red provides financing for multifamily, senior living and health care projects through various FHA and Fannie Mae programs. Under the new ownership it will continue to operate under the Red name. Jim Thompson, CEO of Orix USA said, "We are fortunate to be able to add Red's experience in multifamily, senior and health care finance to Orix Capital Markets' commercial real estate capabilities. FHA and Fannie Mae will continue to be important components of the nation's housing finance programs; the Red acquisition enables Orix to deploy its capital into those important markets." William Roberts, Red's founder and chief executive from 1995 to 2007, has resumed that post. Red currently services $12.5 million in commercial mortgage loans. It also has a registered broker-dealer unit that provides underwriting and syndication of multifamily housing bonds and the related tax credits.

PNC Financial Services Group Inc. says in a new public filing that the troubled loans it inherited through its purchase of National City Corp.-once a top 10 ranked residential lender-eroded more than expected during the first quarter. PNC, which has emerged stronger from the financial crisis, set aside an additional $100 million to offset future losses from the loans. The Pittsburgh-based depository now has $604 million in reserves to account for future losses it expects to be generated by the $9.8 billion portfolio of loans. PNC has kept most of NatCity's residential production and servicing division intact, but is in the process of winding down its warehouse lending unit. Besides operating a mortgage banking affiliate, NatCity was an active home equity and commercial real estate lender. In late 2008 PNC bought the Cleveland-based regional.

The financial turmoil in Greece and other debt-laden European nations could trigger a rebound of mortgage refinance activity in the U.S., or not. Upheaval in the global markets, such as last week's dramatic sell-offs, has historically prompted a "flight to quality"-investor purchases of Treasury bonds. Surging demand for these safe havens for capital can push yields-and the mortgage rates that move in lockstep-down. This in turn has often sparked interest in refinancing, and some lenders say they are already getting more calls from borrowers, which typically happens when mortgage rates fall below 5%. But many lenders also say they need to see a little more downward momentum on rates before an increase in refinancing is likely to stick. Rates would have to drop another quarter-point or more for refinancing to make sense to the large group of borrowers who already were part of a flurry of refinance activity last year. Borrowers would also have to overcome tighter underwriting and appraisal guidelines. And many borrowers still have little or no equity in their homes, making them ineligible to refinance. "A large part of the population that could refinance likely has," said Mark Freedle, chief executive of NetMore America Inc., Walla Walla, Wash. When the stock market fell by nearly 1,000 points last Thursday the yield on the 10-year declined to almost 3.3% before rebounding somewhat. On Monday the 10-year was trading at 3.56%. Because the average mortgage is paid off within 10 years, the 10-year Treasury serves as a bellwether to where mortgage rates might be headed.

Serious delinquencies for U.S. alt-A residential mortgage-backed securities declined month-to-month for the first time in four years and subprime performance also improved for the second month in a row, according to Fitch Ratings. Alt-A RMBS delinquencies dropped to 34.1% in April from 34.4% in March but are still up from 27.4% in April 2009. Subprime RMBS delinquencies in April slid to 45.2% from 46.3% the prior month but continue to be higher than the 40.1% a year ago. Fitch attributed the improvements to more loan modification activity and better liquidation and roll rates. But Fitch also noted that since 35% of subprime loans and 8% of the alt-A loans are modified these loans face redefault risk, which could hurt performance going forward. Managing director Vincent Barberio said the next few months could determine whether the trends signal a turnaround in alt-A and subprime or a more short-lived seasonal uptick. Prime jumbo performance in April deteriorated slightly month-to-month, but the delinquency rate in this category continues to be far better than that of loans in the two other categories. Prime jumbo RMBS during the past month saw 60-plus day delinquencies rise to 10.2% from 10.1% the previous month.

The number of mortgaged homes with negative equity fell slightly in the first quarter to 11.2 million units, according to figures compiled by First American CoreLogic. FACL says almost one-quarter (24%) of U.S. homes are "under water" while 28% have negative equity or a related category called "near-negative" equity. (Roughly 2.3 million borrowers have less than 5% equity.) In 4Q, 11.3 million homes had negative equity. Basing its research on a database of 47 million loans, the company noted that underwater mortgages are concentrated in just five states: Nevada (where 71% of mortgaged homes have negative equity); Arizona (51%); Florida (48%); Michigan (39%); and California (34%). "The aggregate dollar value of negative equity for these deeply underwater borrowers was $656 billion," says the Santa Ana-based company. CoreLogic chief economist Mark Fleming noted that negative equity and unemployment have stabilized over the past six months, which bodes well for future increases in home values. "As house prices grow again and borrowers pay down their mortgage debt, negative equity levels will begin to diminish," he said. "The typical underwater borrower will likely regain their lost equity over the next 5-7 years," Fleming said. First quarter figures from CoreLogic show that borrowers with second liens or home equity lines of credit are twice as likely to be underwater than borrowers with only a first mortgage -- and twice as likely to end up in foreclosure. "The foreclosure rate for borrowers with junior liens was 4% compared to 2% for borrowers without junior liens," the report says.

Fannie Mae purchased 61,929 foreclosed homes in the first quarter and is on track to far surpass last year's REO acquisitions of 145,617. Based on the 'run rate' of the first quarter, the government controlled mortgage giant could wind up taking title to almost 250,000 homes this year, according to an analysis done by National Mortgage News. In 2008 and 2007 the GSE purchased 94,652 and 49,121 REOs respectively, according to supplemental financial information released Monday. The company's policy is to sell the foreclosed homes to consumers but it also uses the bulk sale market which caters to investors.

Stung by increasing credit losses on delinquent home mortgages, Fannie Mae lost $13.1 billion in the first quarter, prompting its regulator to ask the Treasury Department for $8.4 billion in cash to keep the GSE's net worth above zero. A new accounting rule that affects the consolidation onto its balance sheet of 'variable interest entities' added $3.3 billion to its net worth deficit. During the quarter Fannie paid $1.5 billion in dividends on senior preferred stock owned by Treasury. Unlike its cross-town rival Freddie Mac, Fannie saw worsening delinquencies. Its single-family seriously delinquent rate increased to 5.47% at March 31, from 5.38% at year-end. Its credit losses increased to $5.1 billion from $4.1 billion in 4Q. The government controlled mortgage giant noted that it bought $191 billion of loans during the period, $40 billion of which were delinquent loans that came out of its own (existing) securitizations. Fannie also grew its MBS issuance market share to 40.8% in the first quarter from 38.9% in the fourth. With the new request for financial assistance, Fannie Mae's total debt to taxpayers stands at $83.6 billion. Freddie has required roughly $64 billion in aid from the Treasury. Last week Freddie posted a $6.7 billion loss in the first quarter.

Expectations are sinking that big banks can continue to capitalize on their balance-sheet spreads. Net interest margins expanded at most of the nation's biggest banking companies -- all major players in mortgages -- in the first quarter compared with the previous quarter, suggesting banks have found another way to counter continued credit losses. But banks will be hard-pressed to hold on to these healthier spreads amid sluggish loan demand and potentially higher interest rates. "The best they can do over the rest of this year is maintain" margins, said William Fitzpatrick, an analyst at Optique Capital Management, Racine, Wis. He said most of the expansion that took place last quarter likely resulted from aggressive balance-sheet management in recent periods. "Banks will be thrilled if they can keep the margins they have now," he said.