Servicing

When banks modify a mortgage to make the payments more affordable, it is not only considered a troubled debt restructuring by the federal banking regulators, the regulators also expect banks to increase their allowances for loan losses. "It could result in more significant allowances for TDRs," said Kathy Murphy, chief accountant for the Office of the Comptroller of the Currency. The OCC official told the certified public accountants at their annual banking conference that most banks don't have a history of doing loan modifications. Nevertheless, banks are expected to do a Financial Accounting Standard 114 analysis of future cash flows on modified loans using current market trends to determine the appropriate impairment, she said. "Trends right now don't look like real estate is recovering," OCC's chief accountant said. Tom Kelly of PriceWaterhouseCoopers told the CPAs that a lot of firms are struggling with the complexity of FAS 114 and TDRs. "It is complex from an accounting standpoint and from an operational aspect," Mr. Kelly said.

The mortgage and finance company subsidiaries of bank holding companies will now be subject to consumer compliance reviews by the Federal Reserve Board. "The policy, which takes effect immediately, also provides for investigation of consumer complaints against nonbank entities," the Fed said. The Fed is the primary supervisor of bank holding companies but it has traditionally taken a hands-off approach to nonbank subsidiaries. There have been exceptions, however. Fleet Finance, the Atlanta subsidiary of a BHC, was charged and settled state allegations of predatory lending in 1992. Under chairman Ben Bernanke, the Fed initiated coordinated exams of nonbank subs with the Federal Trade Commission and state regulators in 2007. The new policy "builds on the pilot program and responds to a need for more effective supervision and consumer protection," the Fed said.

The House of Representatives late Tuesday approved legislation to beef up the Federal Housing Administration program — including a provision that encourages the Obama administration to provide support for warehouse lending. The "21st Century FHA Housing Act" gives the Department of Housing and Urban Development secretary more flexibility to appoint and fix the compensation for FHA personnel and to fund technology projects to replace FHA's aging information systems. Passed on a voice vote, the bill (H.R. 3146) also says that the Treasury Department, HUD and the Federal Housing Finance Agency should work together to provide financial support and assistance to increase warehouse lending capacity to nonbanks. The National Association of Home Builders, National Association of Realtors and Mortgage Bankers Association supported the bill.

Former top executives at Fannie Mae, PMI, and Countrywide have launched and are seeking to expand a new advocacy group that will lobby on behalf of what it calls "independent, community and regionally-based" mortgage banking firms. The Community Mortgage Banking Project already has 26 members and is talking to eight more, said group founder, Glen Corso, a former senior vice president for The PMI Group, a mortgage insurance firm. His partners in the project include Robert Engelstad, a former senior vice president at Fannie, and Pete Mills, who was Countrywide Financial Corp.'s top lobbyist in Washington. In an interview with National Mortgage News Mr. Corso said his group would not compete with the Mortgage Bankers Association per se but would be involved in lobbying, and legislative and regulatory analysis on behalf of its members. Mr. Corso noted that the CMBP is a "not-for-profit company" but for tax purposes will not be filing as a nonprofit (which enjoy certain federal tax breaks). The MBA, by contrast, is a (Form 990) nonprofit organization with annual results that are publicly available. He said the CMBP would stay away from holding trade shows and getting involved in educational programs — two major sources of revenue for MBA. Mr. Corso is a founding member of The Warehouse Lending Project. That group has been lobbying regulators for government help with efforts aimed at increasing warehouse-lending capacity for nonbanks.

Fitch Ratings, Chicago, has downgraded the insurer financial strength rating of Stewart Title Guaranty Co., Houston, from "A-" to "BBB+" and the issuer default rating of Stewart Information Services Corp., from "BBB" to "BBB-" citing a below average profitability relative to peers and declines in statutory surplus. Through the first half of 2009, Stewart's GAAP pretax operating margin was -7.7% compared to a peer average of 2.8%. Similarly, Stewart's statutory capital levels were down 13% since year-end compared to a dollar weighted peer average of positive 4%. In the past Stewart's ratings benefited from the assumption that the company's technology-related investments would allow it to show better margins than the competition during a down market, but Fitch said this has not been the case. Separately, Fitch downgraded the IDR of First American Corp., Santa Ana, Calif., from "BBB" to "BBB-" and the senior unsecured debt rating from "BBB-" to "BB+". The change in ratings "reflects a heightened scrutiny of the company's 47% debt to tangible capital ratio as of June 30, 2009 given the current stressful environment," Fitch said. FAF has long planned to spin-off its title and specialty insurance business from the information services business. The rating agency said an unfavorable result of the spin-off is that FAF would lose the benefits of the unregulated cash flows of the information solutions business.

California Assemblyman Ted Lieu (D-Torrance) has introduced a bill that would provide for what he calls "state-appointed monitors to ensure homeowners have a chance to work out with their lenders a plan to prevent home foreclosure." California leads the nation in the number of home foreclosures. Mr. Lieu said in a statement, "As distressed homeowners continue to be at the mercy of lenders unwilling to modify their loans, it is imperative that we do whatever we can to keep people in their homes." The Orange County Register questioned whether the bill has any chance of passing but noted that the Assemblyman "has had some success with related bills since the housing crash began. He was one of the key sponsors of the 90-day statewide moratorium — most sizable servicers quickly got exemptions by showing they are doing loan mods — and he backed another bill that passed authorizing the Department of Corporations to collect data on servicers, though the Department cannot release data on individual company performance and consumer advocates say that compromise essentially neutered the bill."

Genworth Financial, Richmond, will take a $65 million provision to settle a $531 million bulk insurance dispute concerning payment option ARMs. In a new filing with the Securities and Exchange Commission, Genworth said it went to arbitration with an undisclosed lender and reached a settlement. The company, which owns the nation's fourth largest MI (in terms of policies-in-force), said "After giving effect to the premiums retained, settlement payments, and other consideration exchanged by the parties, we have made an additional provision for obligations" that will cost it $65 million. Meanwhile, Genworth has commenced a $500 million public offering of common stock in a deal underwritten by Goldman Sachs, Bank of America/Merrill Lynch, and Deutsche Bank. A new research note from Sandler O'Neill says the company is still considering "strategic alternatives" for its MI business.

PNC Financial Services is close to picking a winning bidder on a $600 million portfolio of mostly non-performing second mortgages that belonged to National City Mortgage. Several hedge funds have been mentioned as possible bidders, said one investment banker close to the deal. PNC bought National City and its mortgage business late last year. NCM was a large player in the second lien market, including 80-10-10 structures. A PNC spokesman did not return a telephone call about the matter. Meanwhile, traders say that Bank of America recently came to market with a $100 million package (perhaps larger) of mostly non-performing first liens, some of which came from Countrywide Home Loans. BoA has a policy of not commenting on its NPL auctions.

A large package of jumbo servicing rights belonging to the now defunct Thornburg Mortgage, Santa Fe, is expected to hit the market during the next few weeks, according to investment banking sources. The size of the offering could be upwards of $10 billion of jumbo receivables. An official working on the bankruptcy said he could not comment at this time and referred inquiries to Thornburg's bankruptcy counsel in Maryland. (They had not responded at press time.) Once a publicly traded REIT, Thornburg filed for chapter 11 bankruptcy protection in May. Its bondholders (debtors) are now in charge of its operations. Thornburg's name has been changed to TMST Inc.

Rosario Divins, a self-proclaimed foreclosure prevention specialist from San Antonio, was sentenced to 350 months in federal prison, followed by three years of supervised release, for criminal contempt and mail fraud. In addition to the prison term, U.S. District Judge Fred Biery ordered that Divins pay $83,600 restitution to her victims. According to John E. Murphy, acting U.S. attorney for the Western District of Texas, Divins was convicted in June of seven counts each of criminal contempt and mail fraud. The jury found that since January 2000, Divins engaged in a fraudulent foreclosure prevention scheme. Testimony during the three-day trial revealed that Divins collected more than $80,000 in cash from individuals in desperate financial situations who responded to her mail-out offering to stop their residential foreclosures. Divins continued to implement her scheme despite three separate sanctions from the U.S. Bankruptcy Court for the Western District of Texas ordering her to stop misrepresenting herself and making false promises to her clients.