Servicing

Wells Fargo generated $3.4 billion in income from its mortgage banking operations in the third quarter, up from $3.1 billion in the previous quarter. Residential mortgage originations totaled $94 billion, down by $2 billion from the second quarter. The company said the $55 billion in "pick-a-pay" mortgages it acquired from Wachovia are "performing better than expected." Nearly 50,000 of these payment-option mortgages were modified during 2009 and the borrowers' monthly payments were reduced by 25% on average. The redefault rate is half the industry norm for payment-option mortgages, a company executive said. Overall, Wells Fargo has placed nearly 500,000 of its mortgage borrowers in trial or permanent modifications during 2009. The 60-day redefault rate is about 14%, the executive said.

Bank of America's residential mortgage operation appears be earning money hand-over-fist on an operating basis — until credit charges are factored into the equation. BoA, the nation's largest lender and servicer, reported a $3.8 billion loss in its mortgage and insurance division for all of 2009 compared to a $2.4 billion loss the year before. New figures show that $11.2 billion worth of credit charges (on delinquent loans) have more than wiped out its net profit in mortgage banking. The bank noted that at year-end it had $35.7 billion in nonperforming assets (company wide) and a provision for credit losses totaling $48.6 billion — most of it tied to residential "legacy" mortgages brought in-house when it bought Countrywide Financial Corp. and Merrill Lynch as well as their residential divisions. But according to supplemental materials released along with its fourth quarter earnings, BoA's mortgage banking division had an operating profit (before charges) of $1.8 billion in the fourth quarter, a 13% improvement over the fourth quarter of 2008. In the third quarter, its residential mortgage unit earned $1.4 billion before charges. To date, BoA has said little publicly about selling the problem mortgage loans and securities it acquired from Countrywide and Merrill. In the fourth quarter it funded $83.9 billion in residential loans, double its volume a year ago but a 7% drop from the third quarter.

The Federal Housing Administration is determined to clamp down on bad lending practices and it is preparing to suspend a lender's operations in a whole metropolitan area for six months if one branch has a default rate three times above the norm. FHA commissioner David Stevens said he is prepared to use FHA Credit Watch termination powers for the first time. And FHA will be issuing a mortgagee letter to implement it with an immediate effective date. After one year, the suspension threshold will be two times the normal default rate. "This is strong medicine, but it will have a positive impact," said mortgage banking consultant Brian Chappelle. At the same time, FHA is increasing its monitoring of lenders and it will publish a "report call" on lender performance that lenders can use as a "benchmark," the commissioner said. The Department of Housing and Urban Development also is pursuing regulatory and legislative changes to impose indemnification requirements on all FHA direct endorsement lenders. "This would essentially require all approved mortgagees to assume liability for loans they originate or underwrite should they violate our polices and underwriting standards," Mr. Stevens told reporters.

The Federal Housing Administration, which is trying to bolster its depleted cash reserves, unveiled tighter underwriting guidelines Wednesday morning, including a hefty downpayment for low FICO score borrowers and an increase in the upfront mortgage insurance premium to 225 basis points. However, in announcing the changes, FHA commissioner David Stevens declined to provide any guidance on how much money the changes will raise for the reserve fund. Most of the new guidelines outlined Wednesday will go into effect this spring. The 10% downpayment is required for borrowers with FICOs of less than 580. The MIP will be increased in a few months from the current charge of 1.75 basis points. FHA will allow borrowers to continue financing the upfront MIP. The agency also will pursue legislative authority to allow flexibility to bring the annual premium, which borrowers pay on a monthly basis, higher. (This premium is currently 55 basis points for low-downpayment loans that are popular with borrowers.) Also, seller concessions will be reduced to 3% from 6%. Scott Stern, who runs the Lenders One cooperative said, "On the whole, mortgage lenders will find the new rules painful but necessary. The problem is that for the past four years, FHA was an 'anything goes' environment." He added that, "What makes this hard is with FHA hovering around 40% of new loan originations, even small rule changes echo through the housing market with a big impact."

Though credit availability is expected to pick up this year, it will be a slow improvement, according to a new report released by a group of senior bank economists. At the unveiling of their 2010 economic outlook, members of the American Bankers Association's Economic Advisory Committee said consumer and business lending will recover when other economic factors also show more strength. "Consumers are still retrenching to some extent — paying down debts — and small businesses as well are very conservative and reluctant to take on more debt at this point," said Scott Anderson, a senior economist at Wells Fargo & Co., Mr. Anderson said he expects improvement, "but it's just going to take some time for that to happen." The group predicted 3.1% growth in the gross domestic product. That would be an improvement of 3.4 percentage points over 2009 but much more modest growth than the 6% that has followed previous recessions. "I refer to it or characterize it on my own as a 'half-speed' economic recovery," said Stuart Hoffman, the committee's chairman and the chief economist at PNC Financial Services. He referred to "constraining factors," such as continued problems in commercial real estate and a lack of confidence in consumer spending, as holding back growth.

First Horizon National Corp., the parent of First Tennessee Bank, saw its fourth quarter loss widen, thanks, in part, to charges related to loan repurchases. The company — which lost $70.6 million in the quarter (compared to $52.8 million in 3Q) — said it is dealing with a "challenging economy." In the fourth quarter it booked a foreclosure and loan repurchase provision of $59.3 million. (It did not identify where the loan repurchase requests came from.) In mid-2008 it sold a large portion of its residential mortgage and servicing platform to Metropolitan Life which has a banking affiliate. In the fourth quarter of 2008 the bank lost $63.1 million,

Lenders took back 83 properties per day last year in the tri-county South Florida region, according to CondoVultures.com. In a report based on government records in Miami-Dade, Broward and Palm Beach counties, the consulting firm counted more than 30,000 foreclosures in 2009, and the number "could have been higher" had the local court system not been so overwhelmed, said Peter Zalewski, a principal in the Bal Harbour-based CondoVultures. "The courts and government are searching for creative measures — including online auctions and required discussions between borrowers and lenders at the early stages of mortgage defaults — to stem the foreclosure problem," he reported. Lenders seized 8,864 properties in the fourth quarter of 2009, outpacing the 8,240 properties seized in the third quarter, the 5,992 properties repossessed in the second quarter, and the 7,311 properties taken back in the first quarter, according to the report.

The politically powerful National Association of Home Builders has started the ball rolling on a new policy position regarding the future role and structure of the government sponsored housing enterprises. Though the group's current policy statement was adopted only a year ago, leadership believes that it is now time to become more specific. "Change is coming," said Housing Finance Committee Chairman Earl Armiger, a Maryland apartment builder. "We need to be out front with detailed policies." A final document will go through an arduous vetting process culminating with a vote by the NAHB board at the group's convention in Las Vegas on Thursday. But over the three-day Martin Luther King holiday weekend, the group's housing finance and federal government affairs committees signed off on a carefully worded resolution that, among other things, backs the notion that Fannie Mae and Freddie Mac should retain sufficient government backing to allow them to continue to ensure a reliable flow of credit at reasonable rates. "Mortgages should be packaged and sold as securities with a federal government guarantee of timely payment of principal and interest to investors," the resolution also says. "The federal government should incur exposure only for catastrophic risk." The two panels also voted to back the idea that entities benefiting from securitization of their mortgages should have some skin in the game by paying a fee to capitalize an insurance fund to mitigate government risk. And while they agreed that part of Fannie and Freddie's problems resulted from being public companies with an eye toward their bottom lines, they rejected a call that the two companies be recast as public utilities with limits on their profit. They also agreed that policies concerning the Federal Home Loan Banks should be kept separate so as not to inflict collateral damage on that GSE. "We need to focus on what needs to be fixed," said Dallas builder Kent Conine, a past NAHB president.

Citigroup marked up the asset value of its residential mortgage servicing rights by 15% in the fourth quarter to $6.5 billion, even though the dollar volume of its portfolio of housing receivables is declining. The mark-up in MSR value is mentioned in a new SEC filing accompanying its fourth quarter results. At press time a company spokesman had not returned a telephone call about the change in asset value on the MSRs. The bank's CitiMortgage affiliate services roughly $740 billion in home mortgages compared to $809 billion at year-end 2008. (At Dec. 31, 2008 it valued its residential MSRs at $5.66 billion.) The mega-bank - which is experiencing major declines in residential production - reported total company-wide credit losses of $7.1 billion in the fourth quarter. It took a $2.1 billion net credit loss on its $177.2 billion North American residential loan portfolio, a 7% drop from the previous quarter. Citi said the decline reflected lower losses on second mortgages and an increase of distressed borrowers that have been placed in payment trials for a possible loan modification. "Increasing volumes of trial modifications under the Home Affordable Modification Program contributed to the sequential decline in losses; the loan loss reserve was increased to offset this impact," Citi said in a summary of its quarterly earnings. Overall, 8.3% of its U.S. residential portfolio is 90 days or more past due, an increase of 114 basis points from the third quarter.

Citigroup may test the auction waters with a $400 million portfolio of troubled mortgages, according to investment banking sources who have been briefed on the offering. One buyer of troubled loans told National Mortgage News that Citigroup is already "fishing for bids" on the package. A spokesman for Citi's mortgage group declined to comment. Very few large packages of nonperforming loans have changed hands over the past year unless the Federal Deposit Insurance Corp. is involved in the transaction as a partner or guarantor of some sort.