Servicing

By providing Fannie Mae and Freddie Mac with unlimited capital support over the next three years, the Obama administration can delay fixing the GSEs and use them to pursue more aggressive loan modification programs, according to Washington observers. Keefe, Bruyette & Woods equity analyst Bose George noted that it was unlikely loan losses sparked the Treasury Department's decision to increase its $400 billion commitment to keep Fannie and Freddie operating with positive net worth. "Given this outlook, we believe that the main driver of this significant change is the flexibility it gives the government to take more aggressive action to support the housing market, including potentially going down the road of allowing some form of principal writedowns as part of an enhanced Home Affordable Modification Program," Mr. George says in an "Industry Update" to clients. Federal Financial Analytics points out that the Treasury Department's December 24 statement on the GSEs allows Fannie and Freddie to maintain their large mortgage investment portfolios for another year. Treasury also put any end to expectations that the administration would unveil its plan for restructuring the GSEs in early February as part of the President's budget proposal for fiscal year 2011. "Now we are told only a preliminary plan will come 'around the time' of the budget," FFA analysts said.

PMI Mortgage Insurance Co., Walnut Creek, Calif., sold its entire investment in RAM Holdings Ltd. (RAM Holdings Ltd. is the holding company for RAM Reinsurance Co. Ltd.) Terms and conditions of the sale were not disclosed. The company had impaired its investment in RAM Holdings Ltd. in 2008 and reduced the carrying value of the investment to zero. The completion of this sale continues the company's focus on its core U.S. mortgage insurance operations and the proceeds from the sale will add to PMI Mortgage Insurance Co.'s liquidity position.

The Treasury Department will stop purchasing Fannie Mae and Freddie Mac mortgage-backed securities on Dec. 31, but the department is increasing its capital support for the two financially strapped government-sponsored enterprises. As of Nov. 30, Treasury had purchased $211.5 billion in Fannie and Freddie MBS. "By the conclusion of its MBS purchase program, Treasury anticipates that it will purchase approximately $220 billion of the securities," according to a Treasury statement. Treasury has provided each GSE with a funding commitment of $200 billion to ensure each secondary market agency maintains a positive net worth while the GSEs deal with severe loan losses. Fannie has already received $51 billion in capital infusions and Freddie $60 billion. Now Treasury is lifting the $200 billion cap to accommodate any capital needs over the next three years. "The agreements announced today should leave no uncertainty about Treasury's commitment to support these firms as they continue to play a vital role in the housing market," Treasury said Thursday afternoon. Fannie and Freddie were placed in conservatorships in September 2008.

Moody's Investors Service has lowered Prime Property Fund's senior unsecured debt rating to Baa2. The ratings agency said it was lowering the rating due to "limited financial flexibility and Moody's expectation that the fund will face liquidity pressures in the coming quarters." The fund is comprised of high quality properties actively managed by Morgan Stanley Real Estate.

Valley National Bancorp, Wayne, N.J., the holding company for Valley National Bank, said that it has repaid the Department of the Treasury the final 100,000 shares of Valley's Series A Preferred Stock outstanding that was held by Treasury under the Capital Purchase Program. As announced on Dec. 22, Valley had received approval from Treasury to repay the remainder of the outstanding TARP funds. On Dec. 23, that transaction was consummated, ending Valley's participation in the Capital Purchase Program.

By restructuring certain modified pool mortgage insurance policies, PMI Mortgage Insurance Co., Walnut Creek, Calif., has seen an aggregated statutory capital benefit of $51 million. As part of this restructuring, PMI paid a counterparty aggregate accelerated discounted claim payments of approximately $264 million. The capital benefit is because the deal had a positive impact on PMI's loss reserves for the fourth quarter of 2009.

First Franklin Corp., the parent of Franklin Savings and Loan Co., Cincinnati, revised its earnings for the quarter ended Sept. 30. The revision is due to an increase in loan loss reserves of $334,000 resulting primarily from updated information received on the underlying value of the collateral on a group of loans. This resulted in an increase in the loss for the quarter and year-to-date period of $221,000 ($0.14 per basic share). The company revised the net loss for the third quarter to $1.13 million ($0.68 per basic share) and the net loss for the nine months ended Sept. 30 to $865,000 ($0.52 per basic share). This compares to a net loss of $39,000 ($0.02 per basic share) for the third quarter of 2008 and a loss of $809,000 ($0.48 per basic share) for the nine months ended Sept. 30, 2008.

The Federal Housing Administration has tightened its guidelines on short sales so that borrowers who defaulted on their previous mortgages can't get a new FHA-insured loan. The new guidance is designed to prevent borrowers who want to take advantage of the decline in house prices to buy a new home at a reduced price using an FHA loan for doing so. "Borrowers in default on their mortgage at the time of a short sale (or preforeclosure sale) are not eligible for a new FHA-insured mortgage for three years," FHA says in a mortgagee letter. The new policy has been causing problems for some lenders with loans in the pipeline, according to Bud Carter, an FHA consultant with Potomac Partners in Washington. In general, FHA will not approve loans if the borrower has defaulted within the past three years. However, FHA never provided specific instructions on short sales, Mr. Carter said, so lenders were dealing with this issue on a "case-by-case basis." Mortgagee Letter 09-52 also addresses cases where a lender takes a principal writedown and refinances the borrower into an FHA-insured mortgage. The agency clarifies that the borrower has to be current on all their payments to qualify for an FHA refinancing.

The GSE regulator and the Treasury Department have approved $6 million pay packages for the chief executive officers of Fannie Mae and Freddie Mac. On top of a base salary of $900,000, the CEOs are targeted to receive $3.1 million in deferred pay and $2 million in performance incentives in 2009 and 2010. Both of the CEOs are new this year. Michael Williams was Fannie's chief operating officer before his July promotion to be the government-sponsored enterprise's new president and CEO in April. Mutual fund executive Charles Haldeman was appointed Freddie's CEO in July. Compensation for 2009 will be prorated and all compensation is in cash. (The GSEs were placed in conservatorships in September 2008 and they cannot issue stock.) At the beginning of 2008, former Freddie CEO Richard Syron was targeted to receive $15.2 million in compensation. Former Fannie CEO Daniel Mudd received $12.2 million in compensation in 2007, including $9 million in stock. Under the new compensation program, the second highest paid executives are Fannie's chief financial officer David Johnson ($3.5 million) and Freddie's chief operating officer Bruce Witherell ($4.5 million). Except for CEOs, CFOs and COOs, the base salaries for all other GSE executives cannot exceed $500,000 a year, according to the Federal Housing Finance Board. "On average, the total compensation for executive officers at the two enterprises for 2009 is down 40% from pre-conservatorship levels," FHFA said.

Third-party and retail lender SunTrust Mortgage Inc.'s servicer quality rating of SQ2+ as a primary servicer of prime residential mortgages has been removed from watch for a possible downgrade. The move follows improvements in its call center and incentive compensation scorecard that resulted in Moody's upgrading its assessment of the company's loss mitigation abilities to above average from average. "Since the prior review, the company increased outbound collection call volumes and extended collection call center hours," Moody's said. The rating agency also said that it views SunTrust's foreclosure and real estate owned timeline management abilities to be above average. It views the company's servicing stability as average. The senior unsecured debt rating for SunTrust Mortgage's parent company SunTrust Banks Inc. has a negative outlook. Moody's rates servicers somewhere on a scale between SQ1 and SQ5 on which servicers rated SQ1 are considered strong and those rated SQ5 are considered weak, with plus or minus signs indicating interim points along that scale.