Servicing

The Obama administration's loan modification program is a "failure" that is hurting more homeowners than it is helping, according to a report issued by Republicans on the House Oversight and Government Reform Committee. Representatives Darrell Issa, R-Calif., and Jim Jordan, R-Ohio, claim the administration's Home Affordable Modification Program is "misguided" and hundreds of thousands of borrowers in HAMP payment trials will never qualify for a permanent modification. "Money that could have been spent on affordable rental housing is instead being spent on mortgage payments when many of these homeowners have little hope of permanently keeping their homes," Rep. Jordan said. The congressmen offer few suggestions for improving HAMP but press the Treasury Department to release more information about its net present value test, which is used to evaluate mortgages for a modification. "If the secret NPV test underestimates the re-default rate, servicers will grant too many futile modifications," the report says. Committee Democrats have opened a HAMP investigation and have raised similar concerns about the NPV test. Separately, a public opinion poll commissioned by the National Association of Home Builders shows that 65% of homeowners believe the government needs to do more to keep families from losing their homes.

Industry lobbyists are having a hard time getting senators or their staffs to focus on the issue of MBS risk retention, which could dramatically reduce the securitization of mortgages and other assets - and increase the cost of credit. Senate Banking Committee members are intensely engaged in drafting a regulatory reform bill and fighting over ways to protect consumers, regulate derivatives and deal with the issue of institutions that are "too big to fail." At the same time, there is a consensus on the committee that securitizers - especially those creating MBS - should retain 5% to 10% of the risk when they issue mortgage-backed securities. The holding of this risk is called "skin in the game" and lawmakers see it as a way to prevent another subprime meltdown. But accounting rule changes and a capital regulation recently finalized by the banking regulators have turned this politically attractive concept of imposing risk retention into a roadblock to securitization. "It will not work," said Anne Canfield, executive director of the Consumer Mortgage Coalition. "You will not have any securitizations any more." Under the new capital rule, any bank retaining credit risk (and therefore potentially sharing losses) must hold capital against the entire MBS, not just 5% of the MBS. The risk retention requirement and the additional capital charge "eliminate any benefit of securitizing assets," Ms. Canfield said.

Distribution data show U.S. investors bought 65.8% of Fannie Mae's $4 billion two-year Benchmark Notes new issue on Friday, followed by Asian investors who bought 20.2%. European investors bought just 1.2%. The balance of investors hailed from other miscellaneous geographic regions. Fund managers bought 59.4%, central banks bought 33.1%, state/local governments bought 4.4%, insurance companies bought 2.5%, foundations/nonprofits bought 0.3%, commercial banks bought 0.2% and retail investors bought 0.1%. The new issue due April 4, 2012 (CUSIP 31398AH54) was priced at 99.959 to yield 1.020% at a spread of 20 basis points above the 0.875% Treasury due Feb. 29, 2012. The Benchmark Notes' payment dates are each April 4 and Oct. 4, starting this year. Barclays Capital Inc., Citigroup Global Markets Inc., and Morgan Stanley & Co. are the joint lead managers. The co-managers include Blaylock Robert Van LLC, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., FTN Financial Capital Markets, Jefferies & Company Inc. and UBS Securities LLC.

Fannie Mae said Friday that many mortgage lenders are not complying with the most basic underwriting guidelines, such as confirming a borrower's identity or verifying a Social Security number. Marianne Sullivan, a senior vice president and Fannie's chief risk officer, sent a nine-page letter to lenders announcing a "Loan Quality Initiative" to ensure that loans meet the government-sponsored enterprise's credit and eligibility guidelines. Sullivan said Fannie analyzed the primary drivers of loan-repurchase requests and has launched the initiative to identify ways to improve compliance with its guidelines. "Many repurchase requests are driven by the fact that the delivered loan does not meet Fannie Mae's eligibility requirements," she wrote. In the next few months, the government-sponsored enterprise plans to add quality-control policies to monitor and assess the effectiveness of lenders' own quality-control plans. Lenders now will be required to obtain documentation to confirm the occupancy of a property. They also must determine that a borrower's debts are not only evaluated as part of the qualification for a mortgage but also are disclosed on the final loan application signed by the borrower at the closing table. Separately, Fannie reported Friday that its net loss narrowed to $16.3 billion in the fourth quarter, from $25.2 billion a year earlier. The GSE also said it requested another $15.3 billion from the Treasury to help eliminate its net worth deficit. Fannie has not been able to maintain a positive net worth without government assistance since September 2008. The GSE expects to receive the additional funds from the Treasury by the end of March, bringing its total government support to $75.2 billion.

Stung by continuing writedowns on risky alt-A, interest-only, and negative amortization loans, Fannie Mae posted a $16.3 billion loss in the fourth quarter, and said it would ask the U.S. Treasury for $15 billion in cash to keep its net worth above zero. In supplementary documents filed with the Securities and Exchange Commission, the government-controlled GSE revealed that a stunning 36% of loans it bought from 2005 to 2008 are in some category of delinquency. Its entire book-of-business ($2.796 trillion) carries a 5.38% 'serious delinquent' rate. Its worst loans - in terms of late payments - come from three states: Nevada (a 13% delinquency rate), Florida (12.8%) and Arizona (8.8%). In the fourth quarter of 2008 the late payments for these three were: 4.74%, 6.4%, and 3.4%, respectively. The GSE lost $72 billion for all of 2009, compared to a $59 billion loss the prior year. To date, the Treasury has pumped $75 billion into Fannie and $52 billion into Freddie Mac to keep them in the black. Government regulators - which placed the two into conservatorships in September 2008 - fear that MBS investors will not buy their securities if the GSEs are in a negative net worth position. During the most recent quarter, Washington-based Fannie suffered $11.9 billion in credit losses and a $5 billion write-down for low income tax credit investments. "Through this prolonged stress in the housing market, we are helping homeowners across the country, supporting affordable housing, and providing financing to keep the residential markets functioning," said Fannie's chief executive, Mike Williams.

The Bush Administration appointee who took Fannie Mae and Freddie Mac into conservatorship 17 months ago is disheartened that the Obama Administration has put off resolving the future of the two government-sponsored enterprises. James Lockhart, who is now vice chairman of WL Ross & Co., a private equity firm which owns American Home Mortgage Servicing and a 25% stake in Bank United, told the Midwinter Housing Conference in Park City, Utah, that he is "disappointed" the White House has "taken a pass" on Fannie and Freddie this year. The former director of the Federal Housing Finance Agency, the GSEs' regulator, said, "the whole servicing world has to be re-thought." But starting to rethink the whole mortgage business is an even "more critical issue," he added. "At some point, we need to attract the private sector back into the market." Meanwhile, another Bush appointee, Joseph Murin, who headed the Government National Mortgage Association for two years, told the conference that it's time for Congress to cut Ginnie Mae loose from the Department of Housing and Urban Development. "An entity with such a critical mission can no longer be treated as if it just another program office" within HUD, said Mr. Murin, who founded the Collington Group advisory firm when he left Ginnie Mae last year. If Ginnie Mae "is to fulfill its mission in the years ahead," he said, "it requires a structure that provides for its independence and the ability to respond to the always changing secondary markets." Otherwise, the agency's ability to continue to provide liquidity "will be severely compromised."

PHH Corp., Mt. Laurel, N.J., the nation's largest private label funder and servicer, earned $90 million in the fourth quarter, triple its profit in the same period a year earlier. Its loan production and servicing segments had gross profits of $65 million and $86 million, respectively. However, PHH noted that it had to reduce the asset value of its mortgage servicing rights by $57 million during the period "due to prepayments and recurring cash flows and $10 million of credit-related charges, which was comprised of foreclosure-related charges of $11 million partially offset by a reduction of reinsurance-related charges of $1 million." The writedown was not all that surprising given the nature of interest rates these days, but some larger bank-owned servicers actually marked up the value of their MSRs in 4Q. New CEO Jerry Selitto noted that the company's servicing segment "continued to be affected by provisions for credit-related reserves due to foreclosure activity. We are monitoring our potential exposure carefully," he said.

Fannie Mae completed nearly 40,000 short sales and deed in lieu transactions in 2009, up from 11,700 in the previous year, according to the mortgage giant. "We have increasingly relied on these foreclosure alternatives as a growing number of borrowers have faced longer-term economic hardships and home price declines have increased the proportion of borrowers with negative equity," Fannie said in releasing its 2009 annual financial report. The GSE completed 36,970 pre-foreclosure sales or short sales and 2,650 deed in lieu (of foreclosure) transactions last year. A short sale allows the borrower to sell the property and walk away debt free. It is generally understood that a short sale results in a 20% higher price than a sale of a foreclosed property (real estate owned). In the fourth quarter, Fannie said REO sale prices averaged 56% of the unpaid balance of the mortgage. In a deed in lieu transaction, the borrower simply turns the keys over the lender/servicer. The property ends up as REO. Fannie took over 145,600 foreclosed properties in 2009, compared to 94,650 REO in 2008. The GSE, which is in conservatorship, had 86,150 REO properties in inventory as of December 31.

GMAC Financial Services has tightened standards on a servicing-related program geared toward small- to medium-sized correspondent lenders, according to trade group officials and executives familiar with the effort. Moreover, a top executive who managed the program left the company in recent weeks, National Mortgage News has learned. The effort, known as '3-D,' is a way for GMAC's mortgage division, Residential Capital Corp., to gather servicing rights and grow its portfolio. With 3-D, according to executives familiar with it, the loans are sold to Fannie Mae with ResCap obtaining the underlying servicing rights. "There's certain tax advantages to it," said one servicing broker close to the situation. A trade group official said ResCap eliminated "the bottom tier" firms participating in 3-D "and only wants to deal with high net worth companies." A ResCap spokeswoman stressed that GMAC "has not discontinued" what she called its "rapid delivery program to Fannie Mae, though we may elect to change certain features of the program." She declined to comment further.

The nation's top three processors of residential loans saw their grip on the servicing market decline slightly in the fourth quarter, a sign that ultra low rates are causing more run-off than can be recaptured by these firms. According to new figures compiled by National Mortgage News and the Quarterly Data Report, Bank of America, Wells Fargo & Co., and Chase had a combined servicing market share of 52.79% at yearend, a slight decline from the 53.89% they had at September 30. The three, once again, ranked first, second, and third among all mortgage processors with B of A leading the pack: $2.16 trillion in receivables and a market share of 21.3%. Wells and Chase ranked second and third, respectively, with $1.8 trillion (market share: 17.7%) and $1.4 trillion (13.8% MS). B of A was able to grow its servicing portfolio by 5% year-over-year. Wells had a 1% gain but Chase saw its receivables decline by 7%, according to NMN/QDR.