Servicing

The Federal Housing Finance Agency has cleared Fannie Mae to sell roughly $2.6 billion in low-income housing tax credits to unidentified third-party investors believed to include Goldman Sachs & Co. and Berkshire Hathaway. In a new SEC filing, Fannie notes that it has a "nonbinding letter of intent" to transfer its equity interests in the LIHTCs for an undisclosed amount. Fannie says it will sell them for "a price that exceeds their current carrying value. Upon completion of the contemplated transfer, the unrelated third-party investors would be entitled to receive substantially all of the tax benefits from our LIHTC investments for a specified period of time." Fannie says its regulator told it that it would not object to the sale. The FHFA is now asking for Treasury's approval on the deal. Fannie says that if it cannot sell the tax credits it will take an other-than-temporary impairment charge "to reduce" their carrying value to zero.

Fannie Mae posted yet another stunning loss in the third quarter, $18.8 billion, noting that it now owns or guarantees close to $200 billion in nonperforming assets. The steep loss resulted in the government-controlled GSE having a net worth deficit of $15 billion at the end of September. In tandem with the loss, its regulator has asked the Treasury Department for $15 billion to bring the GSE's net worth above zero. Over the past five quarters Fannie has lost $85 billion. In a new filing with the Securities and Exchange Commission, Fannie offered a slight glimmer of hope for the future: its guarantee fee income rose 12% in the quarter to $1.9 billion (compared to the second quarter). It also predicts that "absent further economic deterioration" its credit-related expenses will be less in 2010 than this year. With 3Q under its belt, Fannie now has combined credit loss reserves of $65.9 billion. Its credit book of business now stands at $3.23 trillion. Fannie Mae and its sister company, Freddie Mac, were taken over by the government in September 2008 and placed into separate conservatorships.

Driven by charges and adjustment expenses in its domestic mortgage insurance business, The PMI Group Inc., Walnut Creek, Calif., posted a net loss of $93 million for the third quarter, a marked improvement over the same period last year when it lost $229 million. The MI suffered $337 million of consolidated losses and loss-adjusted expenses in the quarter, compared to $383 million one year prior. Net premiums written came in at $167 million for the third quarter, down from $176 million during the same quarter last year. The decrease was from a lower volume of new insurance written and higher refunded premiums from rescissions of insurance previously written. PMI disclosed it is in negotiations with one state — which it did not name — over an interpretation it is in violation of that state's financially hazardous condition regulation. If the state prevails the company indicated it could be forced to stop underwriting policies in that state. PMI has a risk to capital ratio of 18.5-to-1. It took steps which resulted in an additional $139 million in surplus capital for the company. There are 14 states that have some form of risk-to-capital standard. In California and Arizona (where PMI is domiciled), as well as North Carolina, steps have been taken to relax the risk to capital ratio requirement of 25-to-1. Meanwhile, PMI is in discussions to write new insurance policies should it fail the risk to capital standard through a recapitalized existing subsidiary.

PennyMac Mortgage Investment Trust, a mortgage vulture fund created by a former Countrywide executive to profit from the mortgage crisis, posted a $730,000 loss for the period ending Sept. 30. Meanwhile, the company confirmed recent market rumors that it is working on a conduit to provide small mortgage lenders "an outlet for their newly originated mortgage loans." PennyMac founder and CEO Stanford Kurland said in a statement that the company has reviewed $6.9 billion in potential acquisitions of nonperforming mortgage assets but refuses to overpay for product. "While some market participants have been willing to accept lower yields and bid more aggressively, we still believe that it is in the best interest of our shareholders over the long term to remain patient in order to maximize the returns from our long-term investment opportunities," Mr. Kurland said in a statement. A publicly traded REIT, PennyMac manages and services about $324 million in assets. Since going public in August, its stock has been thinly traded. On Friday its shares were trading just above their 52-week low of $17.72. Its high is $20.

With the nation's unemployment rate busting through the 10% mark in October, President Obama on Friday signed legislation extending the $8,000 first-time homebuyer tax credit and giving additional tax breaks to certain homeowners trading up. Passed overwhelmingly by Congress, the bill would provide a $6,500 tax credit to homeowners who are buying a new primary residence beginning Dec. 1. The language mandates that to get the credit the homeowner must have owned their home for five consecutive years of the previous eight. But there are caps on the tax credits. They only apply to individual buyers who make no more than $125,000 and $250,000 for couples. There is also an anti-flipping provision: Any homeowner who collects the credit and sells within three years must return the money. The FTHB was extended to cover consumers signing a contract by April 30 and closing by June 30. Meanwhile, the Department of Labor reported Friday that the nation's unemployment rate rose above 10% for the first time since 1983 in October, a much worse jump than expected. The increase in joblessness will lead to an upswing in residential mortgage delinquencies. In October the unemployment rate spiked to 10.2%, compared to 9.8% in September. Economists had forecast an increase to 9.9%.

Residential servicers, a sector that is grappling with a potential tidal wave of loan modifications, are beginning to hire "like crazy" according to Mary Coffin, a senior servicing executive with Wells Fargo Home Mortgage. Ms. Coffin, speaking at SourceMedia's Loan Modification Conference in Dallas, noted that new servicing employees working on modifications are receiving four to five weeks of training in order to deal with the volumes they are facing. An EVP in charge of loan servicing for the nation's second largest player in mortgages, she said servicers are going much deeper in collecting financial information from the borrower. "Servicers have become very holistic looking at the entire problem. We are actually underwriting the financial condition of the borrower in order to pick the right solution that is sustainable," she told conference attendees. The Wells executive noted that there is still much confusion regarding documentation under the government's Home Affordable Modification Program, including re-requesting documents and losing documents. "Because of all the attention on mods, we went from a day when borrowers called to say, 'What can I do?' to sorting through calls and educating borrowers. We are still educating them on what you have to look like before you can get a mod. Borrowers have a high anxiety and fear when signing complex documents."

Even though residential originations swelled in the third quarter, the mortgage banking and brokerage sectors continued to shed jobs in September, according to new government figures. The mortgage banking industry employed 192,400 full-timers during the period, a loss of 1,800 positions from the previous month. (The mortgage numbers trail the national figures by one month.) Broker-related positions dropped 1% to 66,900 positions. (The numbers are exclusive of each other.) According to figures compiled by National Mortgage News and the Quarterly Data Report, residential lenders are on track to fund $2.1 trillion in loans this year, compared to $1.6 trillion last year. The Mortgage Bankers Association believes lenders will fund just $1.5 trillion in 2010, setting the stage for layoffs. Jay Brinkmann, chief economist for MBA, said lenders are holding off on making any personnel decisions until they have a clearer picture of what next year will look like in terms of production. If MBA's forecast proves correct, fundings will fall by 29% next year. However, firms are increasing their staff levels in servicing, loan modifications and compliance, which could buffer the layoff picture for mortgage professionals. During the height of the origination boom three years ago bankers and brokers employed more than 500,000 full time workers.

Wilshire Credit Corp., Beaverton, Ore., is talking to Fannie Mae about becoming a "force-placed" servicer for the GSE, according to investment banking sources familiar with the situation. A Fannie Mae official had no comment and Wilshire did not return a telephone call about the matter. A source close to the situation noted that Fannie is talking to IBM - which recently bought Wilshire's operating assets - about a contract of some type but declined to elaborate. IBM bought Wilshire from Bank of America in October. Merrill Lynch, now a part of BoA, bought Wilshire earlier in the decade.

GMAC Financial Services said during its third-quarter conference call that it would no longer provide separate quarterly or annual reports for Residential Capital Corp., its troubled residential mortgage division. The decision angered analysts that follow the company, which is 35% owned by the government. "It just doesn't send a very good signal to people on our side of the market," Sarah Thompson, a bond analyst at Barclays Capital, said on the call. Craig Emrick, a vice president and senior credit officer at Moody's Investor Service, lamented that there would be a "significant decline in the level of information provided publicly." Because only 300 investors hold ResCap's $4 billion of debt, Securities and Exchange Commission rules do not require it to file financials with the agency. GMAC's chief financial officer, Robert Hull, said the change would save it a "tremendous" amount of money, though he did not specify how much. The row with analysts comes as the $178-billion-asset GMAC has been trying to become less reliant on the capital markets for its funding by expanding the deposit gathering ability of its depository, Ally Bank. ResCap lost $747 million in the third quarter - thanks in part to loan repurchase liabilities - but its performance was a marked improvement over a $2 billion loss in the same period last year. It ranks fifth nationwide in originations.

A loss of $139 million in its mortgage servicing segment was the primary reason for a third-quarter net loss of $52 million at PHH Corp., Mount Laurel, N.J. The mortgage servicing loss was driven by a negative valuation adjustment on mortgage servicing rights of $186 million. Prepayments and portfolio decay were responsible for a $97 million reduction in the value of MSRs while lower rates forced the company to take an $89 million valuation adjustment. Prepayments of the MSRs' underlying mortgages went from $33 million in the third quarter of 2008 to $50 million for the most recent period. Sandra Bell, executive vice president and chief financial officer, noted, "We expect higher delinquency rates to continue to impact credit-related charges through the balance of the year and into 2010, which will likely negatively impact our mortgage servicing segment." Delinquencies at the end of the third quarter by percentage of unpaid balance were 2.28% for loans 30 days late, 0.79% for 60 days late and 1.47% for 90 days or more late. A year ago, those numbers were 2.03%, 0.55% and 0.53%, respectively. The mortgage production segment had a profit of $46 million for the quarter. PHH had origination volume of $9 billion for the period, with 50% coming from purchase loans. Jerry Selitto, PHH's new president and chief executive, said the improved results in the mortgage origination and fleet services businesses were more than cancelled out by the MSR issue. "PHH has been making steady progress in recent quarters, including the signing of a major new private-label account with $1.5 billion in annualized potential origination volume, but we are not satisfied with our financial performance - and we need to move quickly and aggressively to make PHH as competitive as possible for the long term, while staying true to our core, client-focused values," he said.