Servicing

The mortgage servicing industry should brace itself for a continued wave of redefaults on modified loans, according to Diane Pendley, managing director at Fitch Ratings. Speaking at SourceMedia's 4th Annual Servicing Conference in Dallas, Pendley warned residential servicers that the housing crisis will continue and mortgage bankers should dedicate themselves to mitigating losses to stop the financial "bleeding" caused by loan defaults. While Fitch is seeing an increase in modifications, redefaults are continuing. The rating agency is forecasting that an additional 10% to 12% of modified loans will redefault. While borrowers who make decreased payments under HAMP will be able to stay in their homes, unemployment will continue to create stress on delinquencies, said Bryan Bolton, SVP of loss mitigation for CitiMortgage. One of the main drivers of delinquencies is unemployment, speakers at the conference agreed. Amherst Securities is seeing rising default rates in borrowers with negative equity. Lack of equity is a major problem especially on alt-A and payment-option ARMs, said Robert Hunter, a vice president at Amherst Securities.

In February, the total number of delinquent loans was 21.3% higher than the same period last year, according to the latest Mortgage Monitor report from Lender Processing Services Inc. in Jacksonville, Fla. Although the data showed a small 1.45% seasonal decline in delinquencies from January 2010 to February 2010 month-end, the national delinquency rate still stood at 10.2%. In February the foreclosure rate of 3.31% represented a 51.1% year-over-year increase. LPS, a provider of mortgage performance data, says the total number of non-current first-lien mortgages and REO properties is now more than 7.9 million loans. The percentage of new problem loans is also at its highest level in five years. More than 1.1 million loans that were current at the beginning of January were already at least 30 days delinquent or in foreclosure by the end of February. As a result of HAMP, delinquent loans that were modified and that remained current through HAMP's three-month trial period-called "cures-to-current"-have increased. Advanced delinquency rolls, however, remain elevated from a historical perspective. The total U.S. non-current loan rate was 13.5% in February, the report said. States with most non-current loans, which combine foreclosures and delinquencies as a percent of active loans in that state, included Florida, Nevada, Arizona, Mississippi, California, New Jersey, Georgia, Illinois, Ohio and Indiana. States with fewest non-current loans were North Dakota, South Dakota, Alaska, Wyoming, Nebraska, Montana, Vermont, Colorado, Washington and Minnesota.

PHH Mortgage is broadening its subservicing menu, and will take on assignments involving loan loss sharing arrangements with the Federal Deposit Insurance Corp. Among other new initiatives, the Mt. Laurel, N.J.-based PHH will take on servicing assignments that include delinquent loans. It also is offering what it calls a "hybrid" subservicing option that allows client mortgage firms to maintain customer contact while PHH Mortgage completes all the back office servicing processing. According to the Quarterly Data Report, PHH ranks seventh nationwide, among subservicers with $22 billion in contracts at December 31.

Former executives and regulators, testifying Thursday before the Financial Crisis Inquiry Commission, all tried to shift blame for the giant company's problems. Charles Prince, Citigroup's former chief executive, pointed a finger at the credit rating agencies and overly complex products-like collateralized debt obligations-that no one understood. (Mr. Prince was onboard when Citi made several disastrous investments in subprime lenders, including its acquisition of assets from Ameriquest and Argent.) Robert Rubin, a former Treasury secretary and former chairman of Citi's executive committee, laid the blame on a confluence of market events while saying he was out of the loop for most of the company's decisions. The bank's regulators, meanwhile-John Dugan, the comptroller of the currency, and his predecessor, John D. Hawke-criticized the institution, its managers, other regulators and the market in general. If there was an underlying consensus, it was this: the financial crisis was either entirely unforeseeable or should have been spotted first by somebody else.

In dealing with billions of dollars worth of troubled homes, residential servicers need to hire trained engineers, statisticians, and even scientists to enhance the way they approach loss mitigation. Speaking at SourceMedia's 4th Annual Mortgage Servicing Conference, Ocwen Financial Corp. president Ron Faris told attendees, "The problem is that many of us are still using basically the same type of loss mitigation technology we did 20 years ago. We haven't had our industrial revolution yet. We're still craftsmen who hire others to carry out our trade." He noted that Ocwen, one of the nation's top ranked subservicers, has reached out and hired professionals in behavioral science and psychology. The company also has a consumer psychology department headed by a Ph.D. in psychology, he told the audience. "Their focus is on taking what they have learned to help us determine how to approach our customer," he said. "Now it's time to take it to another level." In order for the borrower to get the best payment plan or modification, it does not mean the servicer has to give them a modification at 31% DTI or a modification at the maximum amount the servicer thinks they can afford, for example. Servicers need to have models that optimize the resolution for each individual borrower, he said. "If you give them a lower payment than what they can afford today, you will reduce the redefault probability across a lot of loans, and the net present value to the investor is significantly better than pushing the limit right upfront."

The National Credit Union Administration has entered the Fort Myers, Fla., real estate market in a major way as it struggles to sell hundreds of properties it ended up holding from three large credit union failures: Norlarco FCU, Huron River Area FCU and New Horizons Community FCU. The credit union regulator became the biggest landlord in the adjacent developments of Cape Coral and Lehigh Acres-located just east of Naples-after it took control of the three credit unions. The CUs were among a handful of lenders that helped finance a get-rich-quick scheme known as "Millionaire University" which promised unsophisticated investors a chance to earn a guaranteed 14% return by quickly flipping soon-to-be constructed homes. NCUA projects that it will suffer roughly $700 million in losses on the three CUs. Thanks to the failures, NCUA holds 754 properties, of which 281 are for sale or rent, 254 are still in foreclosure, 34 in litigation and 185 are rented, according to John McKechnie, chief spokesman for the agency. In addition, NCUA has made 158 loans to facilitate the sale of the properties. The agency has hired a professional property management firm to oversee its holdings.

Credit default swap indices compiled by Fitch Solutions show subprime residential mortgage-backed securities prices have continued to strengthen with some variation by vintage. Month-over-month, subprime RMBS overall were up 7% as of April 1. The 2006 vintage, which was up 15%, reached a high not seen since December 2008 in the most recent month. The 2004 vintage was up 9% and the 2005 vintage was up 6%. The relatively weak 2007 vintage, which managed to gain 4% during the market, was still at its third-lowest-ever value. Fitch Solutions' loan-level analysis shows the constant default rate for all vintages dropped during the period. In addition, the constant prepayment rate fell across the board. "While refinancing remains challenging for subprime assets, the general drop in default rates is an encouraging sign," said Fitch Solutions managing director Thomas Aubrey.

During the height of the mortgage boom, a thriving private-label MBS market "threatened" Fannie Mae financially, driving the congressionally chartered mortgage giant into the alt-A market which ultimately led to huge credit losses at the company, a former top Fannie official told a congressional panel Friday. The growth of the private-label securities market threatened Fannie "financially" along with its "relevance" to its seller/servicers, said former Fannie executive Robert Levin in testimony before the Financial Crisis Inquiry Commission. Speaking before the same panel, former Fannie Mae CEO Daniel Mudd testified that the GSE gradually entered the alt-A market and understood the risks. Fannie's alt-A loans performed better "by a factor of two" than alt-A loans generated by the Wall Street conduits, Mudd said. But FDIC chairman Phil Angelides noted that alt-A, subprime and other high-risk loans caused 69% of Fannie's credit losses in 2009, even though they comprised only 24% of total loans. He also noted the GSE was highly leveraged. (At one point, Fannie's alt-A holdings totaled $350 billion.) Mudd said the bulk of Fannie's alt-A loans were bought during the peak of the housing boom and their performance suffered as a result of declining house prices and the nation's economic downturn. In September 2008 the Federal Housing Finance Agency seized control of Fannie, placing it into conservatorship. Upon the GSE's seizure, Mudd was fired. In his opening remarks to the commission, Mudd said the GSE's business model and structure could not "withstand a multiyear 30% home price decline on a national scale, even without the accompanying global financial turmoil."

Morgan Stanley-owned Saxon Mortgage has been identified as the seller of a $6.9 billion bulk package of residential servicing rights to Ocwen Loan Servicing, West Palm Beach, Fla. Industry sources confirmed to National Mortgage News that Saxon was indeed the seller, although there was no investment banker of record on the transaction. A sale agreement was executed at the end of March but was not disclosed publicly until this week. OLS's parent company mentioned the acquisition in a filing with the Securities and Exchange Commission but provided no details on the portfolio, except to say it included 38,000 loans. Both Saxon and Ocwen did not return telephone calls about the sale. Servicing advisors noted that more bulk servicing sales were seen in the first quarter of 2010 than in all of last year. One of the most closely watched pending deals is the auction of roughly $20 billion in rights belonging to the now defunct AmTrust Bank of Cleveland. The Federal Deposit Insurance Corp. is selling the package through Milestone Merchant Partners.

Several medium-sized nonbanks are exploring the possibility of buying depository institutions using cash from stellar residential profits enjoyed over the past 18 months, according to investment banking officials. In interviews with National Mortgage News this week, three active mortgage advisors noted that "the play" for these nonbank acquirors is to solidify warehouse financing. "Even though the warehouse situation has improved in recent months it's still not great," noted one New York-based advisor. "The idea here is to self-fund." These investment bankers did not want to be identified because they are currently working on transactions that haven't closed. One noted that a Midwestern-based wholesaler he's been working with earned $29 million on originations of $1.6 billion last year. He called such a profit performance "unheard of." One risk for nonbank buyers is dealing with delinquent commercial real estate loans of troubled banks. Another challenge is gaining approval from the Federal Deposit Insurance Corp. "In the end will the government accept their business plan?" asked one investment banker.