Servicing

Residential servicers initiated foreclosure proceedings on 1,868 home loans in November in Orange County, Calif., a 55% jump from a year ago but down 13% from October, according to a report in The Orange County Register. The county and surrounding areas are among the hardest hit in the state in terms of home price declines. The big rise in notices of default from a year ago is largely due to a state law enacted in September 2008 that delayed or halted foreclosure filings, at least temporarily. The law requires banks to attempt to talk to borrowers at least 30 days before filing a default notice and discuss options to avoid foreclosure. The law impacts loans made at the tail end of the housing boom, the newspaper reported. Default notices in Orange County have been trending down since July. One reason for the decline is political pressure placed on servicers to help more consumers avoid foreclosure. The largest servicers in California include Bank of America and Wells Fargo.

In setting standards for bank securitizations, the Federal Deposit Insurance Corp. is seeking comment on changing the way residential servicers are compensated and suggesting that depositories should not be obligated to make more than three advances to cover delinquent monthly payments by homeowners. In terms of compensation, the FDIC is asking if servicers should be paid incentives to modify loans as well as actual expenses. The FDIC's proposal also notes that loss mitigation has been a "significant cause of friction" between servicers and RMBS investors. "For RMBS, should contractual provisions in the servicing agreement provide for the authority to modify loans to address reasonably foreseeable defaults and to take such action as necessary or required to maximize the value and minimize losses on securitized financial assets?" the FDIC asks in its advance notice of proposed rulemaking. The receiver of failed banks contends the misalignment of interests in the securitization process has caused significant losses to the Deposit Insurance Fund. The agency wants to fix what it calls these "defects." The proposal is being issued for a 45-day comment period.

Out of an original field of 10 or so bidders, Selene Residential Mortgage Opportunity Fund — which includes MBS co-inventor Lewis Ranieri — has won the auction for roughly 1,000 REO properties that belong to the bankrupt Taylor, Bean & Whitaker of Ocala, Fla. A court is expected to certify the Selene bid on Tuesday, said one official close to the deal. The purchase price is in the range of $80 million but could turn out to be lower with some REO properties falling out of the pool before closing, said the official who requested his name not be used. "This package of properties is not risk free," he said. "Some are practically lots." The single-family properties being purchased are located across the U.S. with a somewhat heavy concentration in California. The Selene RMOF is affiliated with Selene Finance, a Houston-based specialty servicer and REO workout firm. Selene is privately held and does not disclose its servicing or REO portfolio size. A nondepository mortgage banking firm that relied on warehouse lines of credit, TBW filed for bankrupt protection this summer and is in the process of being liquidated.

On Monday, Interactive Mortgage Advisors will officially start the bidding process on an $11.1 billion package of jumbo ARM servicing rights belonging to the bankrupt Thornburg Mortgage, according to officials close to the deal. A jumbo and "super jumbo" lender/servicer, Thornburg Mortgage of Santa Fe filed for bankruptcy protection earlier this year. At Sept. 30, the receivables — which currently are being subserviced — carried a delinquency rate of 3.79% with foreclosures at 2.8%, said one investment banker. "It's their entire servicing portfolio," said the banker. IMA, which is based in Denver, declined to comment.

In setting standards for bank securitizations, the Federal Deposit Insurance Corp. is seeking comment on changing the way residential servicers are compensated and suggesting that depositories should not be obligated to make more than three advances to cover delinquent monthly payments by homeowners. In terms of compensation, FDIC is asking if servicers should be paid incentives to modify loans as well as actual expenses. The FDIC's proposal also notes that loss mitigation has been a "significant cause of friction" between servicers and RMBS investors. "For RMBS, should contractual provisions in the servicing agreement provide for the authority to modify loans to address reasonably foreseeable defaults and to take such action as necessary or required to maximize the value and minimize losses on securitized financial assets?" FDIC asks in its advance notice of proposed rulemaking. The receiver of failed banks contends the misalignment of interests in the securitization process has caused significant losses to the Deposit Insurance Fund. The agency wants to fix what it calls these "defects." The proposal is being issued for a 45-day comment period.

General Growth Properties, Chicago, has received Bankruptcy Court confirmation of the plans of reorganization for 194 debtors which own 85 regional shopping centers associated with approximately $10.25 billion of secured mortgage loans. The plans allow for the restructuring of the 87 secured mortgage loans and the payment in full of all undisputed claims of creditors. Key provisions of the plans include maturity date extensions resulting in an average loan duration of approximately 6.4 years from Jan. 1, 2010, with no loan maturing prior to January 2014, and continuation of interest on the loans at the current non-default rate. The weighted average contract interest rate for the loans covered by these plans is 5.33%. The all-in-interest rate after amortization of fees to be paid in connection with these plans is 5.51%. Among the properties involved are Ala Moana in Honolulu and St. Louis Galleria, plus 15 office properties and 3 community centers. Confirmation of the plans of reorganization for 26 additional debtors owning 10 properties associated with an additional $1.7 billion of secured mortgage loans has been adjourned pending satisfaction of various conditions. GCP and the associated debtors filed for Chapter 11 bankruptcy protection on April 16, 2009.

If covered bonds ever become a reality in the U.S., it would be a $21.5 trillion opportunity for financial institutions with about half of that tied to residential loans, according to analyst Bert Ely. In testimony before Congress, Mr. Ely cautioned that the $21.5 trillion figure is a number that represents the market's potential - not the reality. "While covered bonds will not come close to providing 100%" of the funding for all different asset types "even a 10% share would be enormous," he said. According to testimony before the House Financial Services Committee, the covered bond market has many hurdles to clear including the establishment of a regulator to oversee the business and how to treat a pool of covered assets should the issuer go out of business. A covered bond is bank issued debt that (unlike existing U.S. MBS) is not sold into a legal "trust." This allows investors to look to the issuing bank for repayment if something goes wrong with the credit quality of the underlying loans. The Obama Administration is expected to review the use of covered bonds in crafting its plans to revamp Fannie Mae and Freddie Mac.

Federal regulators are giving banks a one-year transition period to deal with the risk-based capital implications of moving certain mortgage securitizations onto their balance sheets due to recent accounting rules changes that go into effect Jan. 1. The Federal Deposit Insurance Corp. and the other regulators realize that affected banks and thrifts are going to see their assets balloon as they consolidate private-label MBS and commercial securities onto their books. A final rule adopted by the FDIC board of directors allows banks to exclude the consolidated assets from risk-based capital calculations during the first two quarters of 2010. Over the third and fourth quarters, banks only have to count 50% of the consolidated assets for RBC purposes. Banks can adopt these transition options voluntarily starting Jan. 1. FDIC-insured institutions also will see an increase in their allowance for loan losses due to the implementation of Financial Accounting Standard 166 and FAS 167. Regulators are relaxing restrictions on including loan loss allowances in Tier 2 capital for two quarters. FDIC chairman Sheila Bair said banks are already under capital pressure and the transition period is appropriate. "It is temporary and by 2011 banks will need to be fully compliant," Ms. Bair said at an FDIC board meeting. She also noted the transition relief does not apply to leverage capital ratios. "We have always followed GAAP accounting for the leverage ratio so there will be no transition there," she said.

Even though the warehouse lending platform of National City is among the largest in the mortgage space - and continues to be profitable - PNC Financial Services plans to close it by mid-year 2010, according to warehouse lending officials. A spokesman for PNC confirmed the closing but declined to provide details. Commercial banks and other investors interested in the business have contacted PNC about buying the division but those talks have gone nowhere. "It's really a shame," said one warehouse advisor, requesting his name not be used. "They still have about $1.5 billion in commitments." This official noted that nonbank residential originators continue to fear that none of the remaining players in warehouse lending will fill the void once the National City unit ceases to exist. (For the full story see this week's issue of National Mortgage News.)

The American Securitization Forum has released a new set of model representations and warranties aimed at better aligning incentives of mortgage originators with those of investors as part of a larger, ongoing effort to get the new-issue securitized market going again. The new model includes provisions not included in existing market 'reps and warrants' such as making origination parties responsible for the coverage of fraud and enforcing buybacks of 100% of the value of "defective" mortgages. The inclusion of fraud coverage "is probably one of the most significant examples" of differences between the range of reps and warrants currently used in the market today and what the model suggests, Tom Deutsch, deputy director of the American Securitization Forum, told NMN. Mr. Deutsch said the model provides a "baseline set" of recommended reps and warrants that originators and investors may wish to vary from or even reduce if it is agreed, for example, that an originator has strong fraud controls in place. He also noted that the forum had "very detailed involvement from all the major originators" and "it was a tremendous undertaking to get consensus." The model also covers the qualifications and independence of the person performing a property appraisal and requires originators to use "reasonable" processes to authenticate documentation and verify income for loans with less than full documentation. The model is part of the ASF's "Project on Residential Securitization Transparency and Reporting" also known as Project RESTART. The American Securitization Forum sets recommended standards for market participants based on discussions with its members.