Servicing

The stock of Fannie Mae and Freddie Mac is worthless and any hope of recapitalizing the two lies with their seller/servicers, according to a new research report from Keefe, Bruyette & Woods. "In our view, in order for Fannie Mae and Freddie Mac to survive going forward, they need to be recapitalized through investments by the banks that benefit from their guarantee," KBR writes. The firm says that seller/servicers should be required to retain 5% of the loan balance on mortgages sold to the GSEs, adding that the "new agencies" would be capitalized at a "solid 5% level of the new expanded balance sheets" under Financial Accounting Standards Board rules 166 and 167. It says that even under a "bad bank" approach to restructuring them the government would be owed $100 billion. The Federal Housing Finance Agency placed the two into a conservatorship 13 months ago. To date, the Treasury has invested $98 billion in capital into them. Both continue to trade on the New York Stock Exchange -- Fannie for $1.25, Freddie at $1.40.

After rising over 30% a year for the last four years, foreclosures started will finally begin to decline nationally next year according to UFA LLC, a risk management firm that forecasts mortgage and consumer loan performance by zip code. A combination of factors including a slowing of house price depreciation, a reviving economy, tighter underwriting of recent loan vintages, and burnout of the worst vintages from three — five years ago will make the improvement possible, said Dennis Capozza, professor of finance with the Ross School of Business at the University of Michigan and a founding principal of UFA in Ann Arbor, Mich., which conducted the research. "Working against the welcome decline in foreclosures is the steep increase in unemployment, which will interact with the large numbers of homeowners who are underwater to prevent even greater declines in foreclosures that could have been expected without high unemployment," said Mr. Capozza. Each quarter UFA analyzes representative mortgage loans in the serviced portfolio of all mortgages outstanding and estimates the probability of default and prepayment at each month in the future life of each loan. Inputs to the assessment include underwriting variables like loan-to-value ratios and credit scores as well as UFA's own zip code level economic scores, ForeScore Zip.

As part of "Operation Bad Deeds," a joint federal, state and local law enforcement operation targeting mortgage fraud crimes, 41 individuals have been charged in eight separate mortgage fraud cases with allegedly engaging in various mortgage fraud scams that collectively defrauded lenders out of more than $64 million in mortgage loans on more than 100 properties across New York State. Among those charged are six lawyers, seven loan officers, three mortgage brokers, an accountant and a residential property appraiser. According to Preet Bharara, U.S. attorney for the Southern District of New York, 31 defendants were arrested or surrendered to authorities today in New York, Pennsylvania, Ohio and North Carolina. One defendant is expected to surrender to authorities soon. Four of the defendants were previously charged and will appear in Manhattan Federal Court at a later date. Five defendants remain at large. The mortgage fraud scams alleged included property flips, equity stripping and appraisal and loan fraud. In one case, defendants operated a foreclosure rescue scheme, targeting individuals who were on the verge of losing their homes by tricking them into giving up the equity in the properties with false promises that their homes would be saved. The defendants could not be reached for comment.

First Horizon National Corp. — once a large player in mortgages — saw its third-quarter loss narrow as loan-loss provisions continued to fall. Last year it sold part of its mortgage division to Metropolitan Life, a life insurance company. The parent of First Tennessee Bank, Memphis, lost $52.9 million in the period compared to a loss of $125 million in the third quarter of 2008. Revenue dropped 5% to $494.7 million. Results beat analysts' expectations. FNC has trimmed its mortgage banking operations over the past 18 months and sold branches outside its Tennessee footprint. Loan-loss provisions fell 29% to $185 million from the prior quarter and dropped 46% from a year earlier. Last fall, First Horizon received $866 million from the Treasury Department's Troubled Asset Relief Program.

Mortgage delinquencies in the financial services division of General Electric are high and continuing to climb but the rate of increase appears to be slowing. The 13.38% 30-plus-day mortgage delinquency rate seen in the GE Capital Finance unit's managed assets during the third quarter is only slightly higher when compared to 13.23% in the second quarter. But it is up notably from 9.22% during the third quarter last year. GE Capital is a key concern for GE given that the company said falling revenue from that unit was "primarily" behind a year-to-year reduction in the company's total revenue and earnings. Every segment at GE Capital except real estate was profitable during the quarter. GE chairman and chief executive officer Jeff Immelt described the real estate concern as the result of a "tough environment but [one] where we believe the risks are well understood and manageable." The company said it is "preparing GE Capital to be a smaller, more focused franchise." Overall, GE's earnings in the third quarter dropped to $2.4 billion from $4.3 billion during the same period a year ago.

Level 1 Loans, Fort Lauderdale, is auctioning off a $32 million portfolio of Fannie Mae servicing rights. The receivables are backed by loans made in Arkansas. "It's a great time to buy servicing rights," said Level 1 chief Thomas Healy. He said the advisory/brokerage firm is working on another portfolio of receivables that could come to market shortly.

Dreambuilder Investments LLC has agreed to buy $400 million in delinquent second liens from PNC Financial Services, Pittsburgh, for an undisclosed price, according to sources close to the deal. PNC, which for months has declined to comment on the auction, inherited the loans when it bought National City of Cleveland. Executives at the New York-based Dreambuilder, a private equity firm, declined to comment. Originally, PNC was offering $676 million in delinquent HELOCs. At press time it was unclear what happened to the balance of the portfolio. Meanwhile, in one other pending second-lien sale, Jaymes Financial of Virginia is on the verge of completing a $365 million transaction.

The California Senate has cleared a measure that would reinstate the popular $10,000 tax credit for new homebuyers. The measure, which would re-authorize the use of $30 million in credits not awarded during the first program, is expected to be taken up by the General Assembly next week. The state set aside $100 million for the original program, and more than 10,600 buyers were approved for the original credit before the Franchise Tax Board stopped taking applications July 2. But the FTB has since determined that the average credit would be $7,000, not the full $10,000, freeing up $30 million to cover the tax credit extension. Under the bill, only buyers who close after the extension is approved will be eligible. Those who closed after July 2 but before the bill's effective date would not be eligible. On the federal level, lobbyists from the Mortgage Bankers Association and other trade groups are trying to persuade the White House and Congress to extend the $8,000 first-time homebuyer tax credit at least for a few more months.

MGIC Investment Corp., the nation's largest mortgage insurer outside the federal government, posted a massive $518 million loss in the third quarter, sending its share price plunging. Its net loss for the first nine months was $1.04 billion, compared to $249.8 million for the same period last year. Company chairman and CEO Curt Culver blamed the results on a weak economy, higher unemployment and lower home prices. In tandem with the poor results, MGIC said Fannie Mae has approved its insurance unit MGIC Indemnity Corp. (MIC) as an eligible mortgage insurer through the end of 2011. (Mr. Culver said MGIC is seeking similar approval from Freddie Mac.) Loan delinquencies (not including bulk loans) in its book of business were just under 14% for the quarter; one year prior, the delinquency rate was 7.54%. Under the agreement with Fannie, MGIC cannot contribute more than $200 million to MIC, which limits the amount of business it can write going forward. For MIC to start writing new policies, Wisconsin's Office of the Commissioner of Insurance must sanction the unit. In addition, MIC would need a waiver from OCI regarding Wisconsin's capital requirements. There are 16 states, including Wisconsin, that have specific mortgage insurer capital requirements. Under the plan MIC could do business in those states because MGIC would no longer meet minimum capital requirements.

Saddled with delinquent home mortgages, Citigroup reported net credit losses of $9.4 billion in the third quarter, a slight decline from the previous period. Citigroup, which controls the nation's fourth largest residential funder, said its credit losses showed some improvement because of a "higher volume of trial modifications" under the government's Home Affordable Modification Program (HAMP). In total Citi had roughly 63,000 loans in the trial program. The bank said because the modifications are considered "trial" it does not have to charge them off — though the mortgages are considered delinquent. (The bank deferred the recognition of $100 million of net credit losses during the quarter because of the trial designation.) According to its earnings statement, the banking giant completed more than 24,000 mortgage loan modifications during the period. The impact of the HAMP also contributed to the $2 billion sequential increase in loans 90-plus days past due in its North America residential lending business. Citigroup reported net income of $101 million for 3Q09, compared to net income of $4.3 billion in the previous quarter and a net loss of $2.8 billion the same time last year. It posted third quarter revenues of $20.4 billion. Results included $8 billion in net credit losses and an $802 million net loan loss reserve build.