Servicing

Fannie Mae and Freddie Mac have $2 billion at stake in the Stuyvesant Town and Peter Cooper Village debacle in Manhattan — but their former regulator believes they won't be big losers. "They have the most senior piece and they are well positioned," said former Federal Housing Finance Agency director James Lockhart, speaking at the American Securitization Forum conference in Washington. The GSEs are investors in commercial mortgage-backed securities that were issued in 2006 when Tishman Speyer Properties and BlackRock Realty acquired the 11,000-unit apartment complex for $5.4 billion. (At the time of purchase, Mr. Lockhart was the FHFA chief and the GSEs were not wards of the government.) On Jan. 25, Tishman and BlackRock defaulted on $4.4 billion in loans, including $3 billion in senior mortgages. The properties are now valued at $2 billion. "Obviously, that was a bubble transaction. It will have to be unscrambled and it is going to be very messy," said Mr. Lockhart, who is now vice-chairman of WL Ross & Co., a New York vulture fund that specializes in distressed mortgage-related investments.

Eliminating or downsizing Fannie Mae and Freddie Mac would cripple the TBA (to-be-announced) market, which provides a quick and cost-efficient mechanism for issuing mortgage-backed securities, according to an executive at JPMorgan Chase. Speaking at the American Securitization Forum meeting in Washington, JPM senior vice president Garry Cipponeri told attendees that without TBA, "We would be in big trouble." Mr. Cipponeri, during a panel discussion on the future of the GSEs, said mortgage rates would be 150 basis points higher without Fannie/Freddie and the TBA market. Also speaking on the panel was former GSE regulator James Lockhart who noted that MBS issued by Fannie and Freddie today will be backed by the government forever. "We are going to have to create a new security going forward that does reproduce the TBA," said Mr. Lockhart. "That is going to take time and it is going to take capital." Meanwhile, Wellington Denahan-Norris, a top executive for Annaly Capital Management told the ASF audience that the private label MBS market "will not come back for a long time." MetLife managing director Nancy Mueller Handal said servicing issues and the rights of first and second lien holders need to be resolved for the private label MBS market to recover. "Without a clear solution to lien holder rights, it is going to be difficult to invest," said the MetLife executive.

Fannie Mae and Freddie Mac will not become large buyers of mortgage-backed securities this year and will maintain plans to reduce their total asset size, according to a new letter from their regulator. Federal Housing Finance Agency director Ed DeMarco told banking committee leaders on Capitol Hill that the Obama administration wants Fannie and Freddie to concentrate on conserving assets while minimizing credit losses and stressing foreclosure prevention. "This is and will remain the central goal of FHFA and the enterprises," the government-sponsored enterprise regulator says in the letter. FHFA acting director DeMarco also notes in the letter that the GSEs have the flexibility to expand the size of their investment portfolios but notes that such moves will center around purchases of delinquent mortgages out of guaranteed MBS for modification and loss mitigation. The Federal Reserve is expected to end its purchases of GSE MBS at the end of this quarter. Many market observers assumed Fannie and Freddie would step in to fill the void — if necessary — to keep mortgage rates stable. "I expect that other private parties will begin to invest in Enterprise MBS as the Federal Reserve gradually withdraws its purchase activity," Mr. DeMarco says.

The potential for higher-than-expected commercial real estate investment losses is one of the reasons Fitch Ratings, Chicago, has downgraded the issuer default rating for MetLife Inc., New York, from "A+" down to "A". MetLife has an above-average investment exposure to CRE. These investments make up 16% of the company's total invested assets as of Sept. 30, 2009, and consist of commercial mortgage loans, commercial mortgage-backed securities and real estate. Fitch added that a mitigating factor to the downgrade is MetLife's commercial mortgage reserve of $542 million as of Sept. 30, 2009. The rating agency said it is also concerned about MetLife's potential for future investment losses from prime and alt-A residential mortgage-backed securities and hybrid securities. Fitch projects MetLife has a potential for further investment gross losses of between $2.2 billion and $2.6 billion for the period covering the fourth quarter of 2009 and all of 2010. On the positive side, MetLife has a below average exposure to subprime mortgage investments, as the company was very proactive in identifying issues and took steps to reduce its exposure, the rating agency said.

Corporate credit unions — which provide wholesale services to rank and file CUs — are bracing for additional losses on their MBS investments after certain bond insurers were ordered to stop paying claims to preserve capital. Already, some of the biggest corporate CUs are reporting in their year-end financial statements they can no longer rely on private insurance taken out on billions of dollars in troubled MBS, forcing them to realize millions of dollars in new losses, according to a report in Credit Union Journal, a sister publication to National Mortgage News. Members United Corporate FCU, which is expected to report new losses in its year-end financials, told members recently that two bond insurers covering its investments — Financial Guarantee Insurance Corp. and Syncora Guarantee — have been ordered by the New York Insurance Department to stop paying claims in order to preserve what little capital they have. A third bond insurer, Ambac, is also battling solvency issues, prompting Southwest Corporate FCU to take a new $6.9 million write-down on securities it owns, the Dallas corporate reported on Friday.

Wells Fargo & Co. saw a $28.2 billion reduction in unpaid principal balances on legacy 'Pick-a-Pay' mortgages last year, according to an investor conference presentation by the company's chief financial officer. However, there was little detail on how the company achieved its results. At press time, a Wells spokesman had not returned a telephone call about the matter. A recent Wall Street Journal report indicates that Wells has been lowering payments for some underwater borrowers who originally took out Pick-a-Pay loans by offering them extended-term mortgages with interest-only payments. The company also reduced its legacy credit-impaired commercial real estate portfolio by $5.6 billion year-to-year, said CFO Howard Atkins in a web cast presentation from New York. Wells inherited both the CRE portfolio and the negative amortization 'Pick-a-Pay' ARMs when it bought Wachovia in the fall of 2008. Mr. Atkins said that despite these negatives, the Wachovia purchase was beneficial. Wells improved its distribution network and diversified its financial offerings. The deal also allowed it to bolster its origination and servicing volumes. Addressing questions about the company's home equity exposure, Mr. Atkins said performance in that area is relatively good given that it includes some first-lien product and has strong underwriting outside of the third-party sector it exited a couple of years ago. When asked about HAMP modifications' effect on second lien home-equity product, he said he would not take a position other than to note the company is exploring its options. Wells has completed more than 118,000 modifications through the government's Home Affordable Modification Program.

Vulture fund PennyMac Mortgage Investment Trust lost $1.15 million in the fourth quarter, its second consecutive loss since going public last year. The company continues to evaluate loan portfolios and MBS for possible purchase, but also is moving full steam ahead with plans to launch a conduit that will allow it to purchase newly originated loans from small mortgage bankers. Once it accumulates enough product it will issue MBS. Company founder and CEO Stanford Kurland said "at this early stage" losses at the company are not surprising. "Over the past several months, our manager has focused significant attention on its ability to adapt and react to changing dynamics in the mortgage marketplace, including a low volume of available performing mortgage transactions, which offer greater opportunity for value enhancement, and less attractive trading levels for the pools that have been marketed." At yearend, PennyMac reported assets of $324 million and total revenues of just $1.5 million. It took in $1.6 million of interest income on its investments, but had to mark down the value of its holdings by $115,000.

Flagstar Bancorp, one of the nation's top ranked wholesaler funders, reported a fourth quarter loss of $71.6 million, an improved showing over the prior quarter and the same period last year. Meanwhile, the Michigan-based lender originated $6.9 billion of home mortgages in the fourth quarter, a 28% increase in fundings from Q4 2008. For the full year, originations rose 15% to $32.4 billion. Even though its quarterly earnings improved, it lost $514 million for the full year, compared to a $275 million loss the prior year. At yearend Flagstar serviced $56.5 billion in loans. (It is currently shopping around a $10 billion package of receivables.) At year end it held $659 million of non-performing residential mortgage loans, a 51% increase from 2008. It also owns $338 in nonperforming commercial mortgages, a 67% spike from 2008.

The Comptroller of the Currency believes that in light of newly proposed accounting rules regarding "sale treatment," the congressional push to impose risk retention or "skin in the game" requirements on MBS issuers will only hamper a recovery in the private label market. Speaking at a American Securities Forum conference, OCC chief John Dugan called risk retention an "imprecise and indirect" way to improve the underwriting quality of residential mortgages. As an alternative, he thinks federal regulators should set minimum mortgage underwriting standards including requirements for verification of income, and minimum downpayments. These minimum standards would insure that newly funded mortgages are financially sound, likely to be repaid, allaying fears that an asset bubble is being created. Mr. Dugan thinks these attributes will attract investors to the securitization process. He supports risk retention but new accounting proposals prevent securitizers from achieving sale treatment on mortgage backed securities if they retain 5% of that risk. The language is part of a House-passed bill and appears in a recent proposal issued by the Federal Deposit Insurance Corp. "I do think...that minimum underwriting should be strongly considered as an alternative to rigid 'skin in the game' requirements," Mr. Dugan told conference attendees.

Refinancings at Fannie Mae and Freddie Mac surged 37% in the month of December to the highest level since August, according to the GSE regulator. The government sponsored enterprises purchased nearly 297,000 refinanced loans from lenders in December, up from 217,100 in November. "Total refinance volume rose in December in response to a gradual June to November decline in rates," the Federal Housing Finance Agency said in a report. December's surge includes refinancings of 33,347 borrowers with Fannie and Freddie loans under a special program for homeowners with loan-to-value ratios between 80% and 105%. Launched April 1, the Home Affordable Refinancing Program has helped 188,250 difficult-to-refinance homeowners take advantage of historically low mortgage rates in 2009 and lower their monthly payments. HARP does not require the purchase mortgage insurance. On October 1, FHFA expanded HARP to refinance underwater borrowers with LTVs greater that 105% and up to 125%. During the fourth quarter, the GSEs refinanced 1,900 of these higher LTV loans, including 1,100 in December.