Servicing

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.

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.