Servicing

Short sale listings, all 10,383 of them, outnumber foreclosures two-to-one in the Las Vegas area, but take-backs are outselling short-sales by a ratio of four to one, according to local broker Robert Jenson of the Jenson Group. And together, distressed properties of both varieties accounted for 79% of the 3,235 Sin City properties which changed hands in October. That's down two percentage points from 81% last month, Mr. Jenson reports, and it's the lowest share of the market since September a year ago. Overall, the luxury broker says in his monthly report, inventory, sales and prices have remained relatively flat. The total number of properties on the local MLS is 19,891, including 626 manses and 30 condos offered at $1 million or more, and the average price paid in October was $159,959. That's $24 more than in September, but $83,000 lower than the average in September 2008.

Senate Banking Committee chairman Christopher Dodd, D-Conn., has produced a "discussion draft" of a comprehensive regulatory reform bill that requires sellers of mortgage-backed securities to retain 10% of the credit risk. The House Financial Services Committee is moving toward approving a similar bill to address systemic risk that also requires 10% risk retention — a mandate that the mortgage industry opposes. "To restore confidence in our markets and encourage investment, we will require companies that sell products such as mortgage-backed securities to keep 'skin in the game' so that they won't sell worthless securities to investors," Sen. Dodd said. His bill also creates an independent Consumer Financial Protection Agency to protect consumers from "hidden fees and abusive terms" so they know they are being offered "safe" mortgages and other products, the chairman told reporters. Sen. Dodd said he will seek input on his draft bill and reach out to Republicans in an attempt to mark up and approve a bill by the first week of December. Dodd's CFPA plans focuses on companies that "pose the greatest risk to consumers — mortgage bankers, brokers, finance companies and the largest institutions," according to a legislative summary.

Fraud continues to flourish in unstable metro areas in Arizona, Nevada, Southern California and Florida and is popping up in surprise locations like Bend, Ore., according to panelists at the SourceMedia Loan Modification Conference in Dallas. Ann Fulmer, vice president of business relations at Interthinx, said fraud is increasing in these markets among distressed borrowers through foreclosure rescue and loan mod scams. The industry is seeing illegal flipping of REO properties, false appraisals, tarnished broker price opinions and loan reductions in short sales. "There is no training in fraud recognition for servicers. They are pressed for time," she told conference attendees. It is crucial to find ways to train key loss mit staff and to verify a property's listing history, the speakers stressed. Lenders and servicers should create a red flag list within the shop of what to look out for, including a list of other parties and companies they work with on a regular basis, and identify borrowers with multiple loans for properties. In Dallas alone, Chris Day, a special agent in mortgage fraud from the FBI, said there are 75 cases of fraud, each one with at least $1 million in losses, and Dallas "isn't even a fraud hot spot." It is members of the industry who will correct this problem, he said. "Separate each transaction out. Identify things that don't fit. False companies and associations to maybe another case."

Over the past nine months Freddie Mac has received $658 million from mortgage insurance firms to cover losses on delinquent loans, but in a new public filing the GSE reveals that if the MI industry collapses its risk exposure would be $63.4 billion. Eight different MI firms have written policies on Freddie Mac loans with MGIC and Radian being the two largest in terms of outstanding coverage, $15.5 billion and $12.1 billion, respectively. Despite the shaky state of the housing market not one MI has failed, though one company, Triad Guaranty, is in self-liquidation mode. In a filing with the Securities and Exchange Commission, Freddie notes that it has "institutional credit risk" relating to "the potential insolvency or nonperformance of mortgage insurers" that cover its loans. But the GSE also says that based on "currently available information" it expects that all of its MI counterparties will continue to pay claims even though many have received "credit watch negative" ratings. The $63.4 billion figure represents the "remaining aggregate contractual limit for reimbursement of losses" of principal, Freddie says.

Freddie Mac had credit-related expenses of $7.5 billion for the third quarter, which was the leading driver of its $6.3 billion net loss to common stockholders. Without a $1.3 billion dividend payment to the U.S. Treasury, the loss would have been $5 billion. During the quarter, Freddie Mac had further deterioration in its single-family guarantee portfolio. The delinquency rate went from 2.78% at the end of the second quarter to 3.33% at the end of the third quarter. The company blamed the increase on weak economic conditions and, in part, to extended foreclosure timelines and to a high volume of seriously delinquent loans that are remaining in trial periods under the Home Affordable Modification Program that might have otherwise completed modification or proceeded to foreclosure. Single-family net charge-offs increased to $2.2 billion in the third quarter of 2009, compared with $1.9 billion in the second quarter of 2009, while nonperforming assets increased to $91.6 billion from $76.9 billion during the same period. Freddie Mac had positive net worth of $10.4 billion at Sept. 30. As a result of the positive net worth, no additional funding from Treasury was required for the third quarter. The positive net worth reflects an $8.5 billion gain in accumulated other comprehensive income primarily driven by improved values on the company's available-for-sale securities.

Fannie Mae and Freddie Mac are becoming increasingly concerned that mortgage servicers will not be able to honor their obligations to repurchase bad loans. Fannie expects repurchase and reimbursement requests will remain high in 2009 and into 2010 and it already has a significant number of requests that have not been paid. "Due to the current housing and economic environment and the adverse impact on our servicers, we may be unable to recover outstanding loan repurchase and reimbursement obligations resulting from breaches of representations and warranties," Fannie says in its third-quarter financial statement. Fannie does not disclose the amount it collects from servicers. But Freddie Mac reported that its servicers have repurchased $2.7 billion in bad loans during the first three quarters of 2009, including $960 million in the third quarter. "Our exposure to seller/servicers could lead to default rates that exceed our current estimates and could cause our losses to be significantly higher than those estimated within our loan loss reserves," Freddie says in its third-quarter financial statement. Lenders that sell loans to Freddie and Fannie are required to make representations and warrantees that the loans comply with the government-sponsored enterprises' underwriting requirements. If the loans don't perform as expected and underwriting deficiencies are flagged, the lender is obligated to buyback the loan.

While a macroeconomic recovery has set in and will continue in 2010, Freddie Mac's chief economist Frank Nothaft said at the SourceMedia Loan Modification Conference in Dallas more bad news is coming for the mortgage market going forward. "We haven't seen the peak of the mortgage delinquency rates." Currently, he said, the serious delinquency rate — or number of loans 90 days plus late in mortgage payments among Freddie Mac loans — is the highest it has been since the 1930s. Compared to 0.5% in 2006, it spiked up to 5.4% in 2009, showing how the mortgage crisis has moved from the subprime to the conventional arena. Also, in 2005 the share of subprime loans serviced in the U.S. that defaulted represented 46%, or almost half, during the first half of 2009 that percentage dropped to 11%, with most defaulted loans being prime or alt-A. The economist noted, nonetheless, that there will be a recovery, however modest. The most recent unemployment data are not heartening and will continue next year at least during the first quarter, he said. However, Mr. Nothaft theorized that the aggressive monetary policy, the fiscal policy and the stimulus package benefits will lead to sustained recovery over time.

The Treasury Department has turned down Fannie Mae's request to sell roughly $2.6 billion in low-income housing tax credits to Goldman Sachs. The denial letter came late in the day Friday. The Federal Housing Finance Agency had cleared Fannie to sell the LIHTCs but the ultimate decision rested with Treasury. (Berkshire Hathaway had also expressed an interest in buying the tax credits.) In a filing with the Securities and Exchange Commission, Fannie — without mentioning Goldman — said it had an offer to sell the credits for "a price that exceeds their current carrying value." According to combined press reports, Treasury nixed the sale because it was not in the best interests of taxpayers. Over the past five quarters Fannie has lost $85 billion. Goldman could have used the LIHTCs to reduce its tax burden to the government.

Fannie Mae has rolled out a new program under which it will offer market-rate leases for terms of up to a year to troubled borrowers who turn over the deeds to their homes. The company offered no estimates on how many borrowers it thinks might use the program. The GSE's "Deed for Lease" effort is designed for homeowners headed toward foreclosure that do not qualify for loan modifications. They must document that the market rate rent does not exceed 31% of their gross income. Buyers of foreclosed properties are to assume the leases. Since January, Fannie has offered month-to-month leases to tenants whose landlords have lost their properties to foreclosure. Freddie Mac has offered month-to-month leases to both tenants and former borrowers since March. To date, neither effort has generated much use. Last month, Fannie said it had executed just 200 leases to date.

Ohio's attorney general is suing American Home Mortgage Servicing — a business controlled by vulture fund investor Wilbur Ross — accusing the company of what the state calls "incompetent and inadequate customer service." State attorney general Richard Cordray levied a plethora of charges against AHMS, including failure to offer loan modifications on a timely basis and "unfair and deceptive" loan practices. According to the lawsuit, AHMS required loan modification agreements that forced consumers to pay excessive fees and waive their rights in order to get help. The suit also alleges that the terms of loan modifications were unconscionably one-sided in favor of AHMS. Mr. Ross built AHMS from two failed nonprime servicers: Option One Mortgage and American Home Mortgage. AHMS is based in Coppell, Texas. It services more than 12,000 subprime and prime consumers in Ohio, according to the AG. Mr. Cordray is seeking a permanent injunction against AHMS. The servicer, though, is fighting back. It is countersuing the state, saying the allegations are false and cannot be supported. AHMS EVP and chief legal officer Jordan Dorchuck said the firm is committed to "keeping borrowers in their homes." It says it tried to meet with the Ohio AG to discuss the issues raised it the lawsuit but the state refused.