Servicing

As the number of distressed hotel assets continues to rise — many with foreclosure eminent — an increasing number of hotel lenders will be transitioning to a more active ownership role, according to one management firm. Capital Hotel Management in Beverly, Mass., said it expects to see an exponential leap in demand for hotel asset management services from lenders as they look for qualified hotel receivers. "The lending community has reached the stage where they no longer can delay foreclosure issues," said Chad Crandell, president of CHM. "We certainly will see more foreclosures in 2010 than any year since the RTC days of the early '90s." The current lack of available financing, coupled with a continued decline in performance projected for at least the first half of 2010, could likely push the transaction window well into 2011 or 2012, according to the company. The company said the pressing decision for lenders will be to sell short or commit to a potentially longer hold period. In either case, special servicers and lending groups will need hotel-specific experts, the firm believes.

Federal Housing Administration is giving its mortgage servicers more latitude to assist borrowers who are running into financial problems but have not yet missed a payment. Under a new policy, servicers can offer these borrowers forbearance or even a reduction in principal under the FHA-HAMP program. Previously, the servicers could not consider these options until homeowners with a FHA-insured loan had missed several monthly payments. "Now servicers will have additional options for those borrowers who seek help before they go delinquent, which increases the likelihood that the borrower will be able to retain their home," FHA commissioner David Stevens said. The FHA-HAMP program allows servicers to reduce the principal amount of a FHA-insured mortgage by up to 30%.

All banks and thrifts are having problems with commercial real estate loans, not just small community banks, according to FDIC chairman Sheila Bair. "Despite what you may be hearing, CRE credit problems are affecting big and small banks alike," the Federal Deposit Insurance Corp. chairman said in a prepared speech delivered at a Commercial Mortgage Securities Association conference in Washington, D.C. As of Sept. 30, FDIC-insured institutions held $1.3 trillion CRE and multifamily mortgages — nearly 18% of total loans. And $44.8 billion are classified as noncurrent (90-days or more past due or considered uncollectible). Banks and thrifts hold another $500 million in construction and development loans and 15% of these are noncurrent. "The annualized net charge-off rate of 6% on C&D loans in the third quarter significantly exceeds the highest rate of the last crisis, which was about 4%," Ms. Bair said. FDIC expects delinquencies and charge-offs will move higher in the coming quarters.

Mortgage banking income at U.S. Bancorp, Minneapolis, increased by $195 million in the fourth quarter 2009 over the same period one-year prior, driven by mortgage loan production volume of $11.1 billion. For the full year, the company had mortgage loan production volume of $55.6 billion. The company reported fourth quarter 2009 mortgage banking revenue of $218 million, down from $276 million in the third quarter but up from just $23 million in the fourth quarter 2008. For the full year, mortgage banking income was over $1 billion, compared with $270 million for all of 2008. The fourth quarter year-over-year increase is due, U.S. Bancorp said, to the lower interest rate environment. This led to strong mortgage loan production and related production gains. In addition, the net change in the valuation of mortgage servicing rights and related economic hedging activities was favorable and servicing income increased compared with the same period in 2008. Residential mortgage loan net charge-offs were $153 million in the fourth quarter of 2009, an increase over $129 million in the third quarter of 2009 and $84 million in the fourth quarter of 2008. Commercial and commercial real estate loan net charge-offs increased to $457 million in the fourth quarter of 2009, compared with $433 million in the third quarter of 2009 and $216 million in the fourth quarter of 2008.

For the fourth quarter of 2009, nonperforming assets decreased from the prior quarter by $289 million for KeyCorp in Cleveland, Ohio, for the first time since the fourth quarter of 2006. Most of the reduction came from nonperforming loans held for sale and a decrease in nonaccrual loans in the commercial portfolio, resulting from the charge-off of two large commercial real estate related relationships in the real estate capital and corporate banking services line of business within the national banking group. As a result of increased loan losses, write-downs of commercial real estate related investments, the provision for losses on lending-related commitments and costs associated with other real estate owned, at the end of the quarter, allowance for loan losses was $2.5 billion up from $1.6 billion one year ago. For the full year, Key had a net loss from continuing operations of $1.581 billion compared to a net loss of $1.337 billion for 2008. CEO Henry L. Meyer III said during the fourth quarter the company saw improvement in its credit metrics, including decreases in delinquencies, nonperforming loans and nonperforming assets. "Our allowance for loan losses stood at 4.31% of total loans and 116% of nonperforming loans at December 31." At Dec. 31, 2009, nonperforming loans totaled $2.2 billion. Nonperforming assets totaled $2.5 billion and represented 4.25% of portfolio loans, OREO and other nonperforming assets, compared to 4.46% at September 30, 2009, and 2.00% at December 31, 2008.

The residential mortgage banking segment at PNC Financial Services Group, Pittsburgh, recorded earnings of $25 million for the fourth quarter and $435 million for the full year 2009. Income for the third quarter was $91 million; the quarter-to-quarter decline is due to lower loan sales revenue, reduced net hedging revenue on its mortgage servicing rights, lower servicing fees and lower net interest income. Loan volume in the fourth quarter was $2.3 billion, down from $3.6 billion in the third quarter. The mortgage servicing portfolio was $145 billion as of Dec. 31, 2009, compared with $158 billion at the end of the third quarter. PNC said during the fourth quarter, it sold $7.9 billion of mortgage servicing rights; in addition, run-off slightly outpaced new loan origination volume. Overall PNC earned $1.1 billion in the fourth quarter and $2.4 billion for the full year. The company reemphasized the residential mortgage origination business following its acquisition of National City Corp. at the end of 2008.

Fitch Ratings on Thursday upgraded the short- and long-term issuer default ratings on GMAC Inc., in the wake of the Treasury Department recently pumping $3.8 billion into the struggling company. GMAC is the parent of Residential Capital Corp., the nation's fourth largest servicer of home mortgages. Fitch upgraded both ratings to 'B,' noting that GMAC "has addressed the capital shortfall identified through the Supervisory Capital Assessment Program." Treasury is now a 56% shareholder in GMAC, which has been contemplating selling ResCap, or some of its assets. Fitch said the new capital from Treasury provides "further cushion and flexibility to address the mortgage business in an orderly manner." Fitch anticipates that GMAC will remain above the 15% total risk-based capital requirement, even factoring in the adoption of FAS 166 and 167, which require consolidation of off-balance sheet vehicles. Concurrent with the capital actions, GMAC took large write-downs on mortgage-related assets, classifying some as held-for-sale. Fitch believes future volatility emanating from GMAC's residential mortgage business will be significantly lower, particularly given the continued contraction of mortgage loans at the company — $28 billion at Sept. 30.

Further declines in home prices, driven by distressed sales, are expected in the early months of 2010 followed by a recovery this spring, but that is now projected to be much smaller and to occur later than previous forecasts indicated, according to First American CoreLogic and its LoanPerformance Home Price Index. National home prices, which include distressed sales, declined by 5.7% in November 2009 compared to November 2008. On a month-over-month basis, prices went down by 0.2% compared to October 2009. Nationally, the HPI is predicted to be down only 0.23% by November 2010. For the top 45 largest CBSAs, HPIs are projected to rise an average of only 1% through November 2010, with the bottom in most markets being reached in April or May of 2010 as a result of expectations of high unemployment, foreclosures and higher interest rates in 2010. When distressed sales were included Nevada (-22.6%) remained the top-ranked state for annual price depreciation followed by Arizona (-14.9%), Florida (-13.7%), Michigan (-12.6%) and Idaho (-11.0%). Excluding distressed sales, the worst five states for year-over-year price declines changes slightly. Nevada (-19.7%) still holds the top spot, followed by Arizona (-14.1%), Florida (-12.3%), Michigan (-10.6%)and West Virginia (-9.6%). The markets expected to experience the largest year-over-year declines are in the traditional industrial centers of the Midwest and Great Lakes that have been hit hardest by the current recession. These include the Michigan cities of Detroit (-13.1%), Sault Ste. Marie (-11.0%), Saginaw (-9.7%) and Kalamazoo (-7.8%). The hard-hit markets of the Sun Belt are also predicted to hit their true bottom in the next 12 months, as evidenced by a substantially smaller rate in their projected price declines relative to the pace of decline in 2009. These markets include Las Vegas (-6.5%), Phoenix (-3.3%), Reno (-3.3%) and Orlando (-2.5%). "While the share of REO sales are down, allowing price declines to moderate, there is concern moving forward with the levels of shadow inventory, negative equity, and the ability of modification programs to mitigate this risk," said Mark Fleming, chief economist for First American CoreLogic.

The performance of prime residential mortgage-backed securities from 2005 to 2008, while better than other types of RMBS from that timeframe, has deteriorated at a faster pace, according to rating agency DBRS. "The deterioration was particularly alarming in the last 12 months," said the company originally known as Dominion Bond Rating Service. For example, DBRS data show between December 2008 and December 2009 the subprime sector saw a 12% increase in serious delinquencies while prime RMBS saw serious delinquencies ramp up by 47%. However the prime sector continues to have the lowest level of overall defaults and expected losses among RMBS sub-types, the rating agency said. In addition, prime fixed rate mortgages generally have a much better track record when it comes to serious delinquencies than adjustable-rate mortgage product. "Measured by the latest serious delinquency rates, fixed-rate prime mortgages on average performed 40% better than their ARM counterparts," the rating agency said.

Morgan Stanley took $1.9 billion in net losses on investments in real estate during 2009 due to what it said is an ongoing decline in the market. The company said this affected its firmwide results when discontinued operations are included: net income of about $1.35 billion and a loss of $0.76 per diluted share. This compared to a net loss applicable to Morgan Stanley of $246 million, or $0.71 per diluted share in 2008. During the fourth quarter, net income was $617 million, or $0.29 per diluted share, compared with a net loss of about $10.9 million, or $11.35 per diluted share, in the fourth quarter of 2008.