Servicing

Securitization and yield spread premiums are incentives for bad loans to be made in a volume-driven reverse mortgage market, according to a new study by the National Consumer Law Center. The group issued a report saying that many of the ingredients behind the subprime crisis are now being seen in the reverse mortgage business. During a conference call, Rick Jurgens of NCLC said "arrangers get paid when deals get done and they don't get paid when no deal is done and that's a problem. The lesson from the subprime debacle is even stronger in this market." The approach to allow market forces to drive out the bad players was tried during the subprime crisis and didn't work, he said. When asked whether it made a difference that almost all of the reverse mortgages being securitized today are through government channels (unlike subprime loans which went through Wall Street firms), Mr. Jurgens said "I don't think we can take too much comfort that the capital markets are in bad shape right now to think that we won't see some of that same drive to do deals coming out the other side." NCLC believes reverse mortgage customers need strong consumer protections and "the tiger of securitization has to be harnessed before we go for a ride on that one again," he said.

Thirty-year mortgage-backed securities prepayments generally came in slower than expected in September, Wall Street research reports show. Aggregate speeds on 30-year Fannie Mae MBS during the month were 11% slower than in September while 15-year product saw smaller declines, according to two firms' reports. A Credit Suisse research report said the slowdown in 15-year product was in line with its expectations and the slowdowns in respective prepayment speeds for different coupons in all products "were similar across the two agencies." Thirty-year 5s, 5.5s and 6s slowed by 9%, 13% and 10%, respectively, and were "significantly slower than expectations," according to a Deutsche Bank report. "September's slow speeds indicate that mortgage originators are not engaging in the aggressive outreach to in-the-money borrowers as they did in 2003 and other recent refi waves, and that borrowers who refi on their own mostly already refinanced last spring," Deutsche Bank said. Speeds could slow going forward due to lower rates, but "any October speedup should be modest," according to the Deutsche Bank report.

Fannie Mae and Freddie Mac have been given the green light by their regulator to aid the warehouse lending market by issuing guaranteed purchase agreements on residential loans that are in the process of being funded, according to industry officials familiar with the plan. At deadline, the GSEs and their regulator had not returned telephone calls about the matter. It's believed that if Fannie and Freddie issue a commitment to purchase a loan (a loan that is in the process of being funded) the warehouse lender of record will have to hold little or no capital against it, said one observer. This would make warehouse lending - which is already a profitable niche - even more so. Until now, the capital banks must hold against these credits has been one of the stumbling blocks to new entrants coming into the business. Over the past few months two of the largest players in warehouse lending - Colonial Bank of Alabama and National City of Cleveland - have either exited the sector or announced plans to do so. NatCity's warehouse group may be sold by its current owner, PNC Financial Services. Colonial failed this summer. Some of its clients are still being served by it acquirer, BB&T.

U.S. subprime residential mortgage-backed securities prices are continuing to stabilize but there is little sign of any increase in value, according to a Fitch Solutions index. The index, which tracks credit default swaps of RMBS, as of Sept. 1 had fallen just slightly from the previous month, dropping three basis points to 8.31 from 8.34. The index also showed improvement in some vintages' default rates. The 2007 vintage's default rates were 18% less than they were in May while the 2006 vintage's default rates were 14% less than they were in May. Despite this, "asset values have not shown any sign of recovery," the company said.

DebtX, which brokers non-performing loan sales for the government and other sellers, is now charging certain bidders a $500 non-refundable vetting fee. Company CEO Kingsley Greenland told National Mortgage News that only FDIC-insured banks and government sponsored enterprises will be excluded from the charge. A posting on its website says the DebtX market is "limited to sophisticated, qualified investors." Mr. Greenland said the non-performing loan market has grown dramatically in recent years, noting that "We're seeing folks who may not have the required experience" get involved in the bid process. He added that the NPL market is "maturing and evolving" and "we need more research."

The mortgage servicing division of IBM has agreed to buy the core operating assets of Wilshire Credit Corp., a non-prime subservicing specialist, from Bank of America for an undisclosed sum. IBM expects to retain most of Wilshire's 900 employees. Earlier in the decade Merrill Lynch bought the Beaverton, Ore.-based Wilshire, which at one time had been a subprime originator. (BoA inherited Wilshire when it bought Merrill.) Wilshire services roughly $20 billion in loans, according to industry sources. Wilshire's operating assets will become part of IBM's Lender Business Process Services business unit, a wholly-owned subsidiary of the Armonk, N.Y.-based technology giant. Wilshire will work with its clients, IBM and Bank of America to transition its mortgage servicing rights and related assets to Bank of America. The agreement remains subject to customary closing conditions.

Lisa Torres, formerly of Johnston, R.I., pleaded guilty to a $1.7 million mortgage fraud scheme in which she purchased properties that had recently been foreclosed upon, and then used the names of straw purchasers in sham sales to finagle mortgage financing. According to Peter F. Neronha, U.S. attorney for the District of Rhode Island, between October 2007 and June 2008, Torres purchased nine residential properties in Providence. She then enlisted the aid of others, some willing participants, others unwitting dupes, to arrange sham sales of the properties at inflated prices in order to obtain mortgage financing. The loan proceeds went to Torres, the purported seller of the properties, so she profited the difference between what she had paid for the properties, about $1.1 million, and what she purportedly sold them for, about $1.7 million. Torres is currently serving a federal prison sentence for obstruction of justice, conspiracy and making false statements, a case that was prosecuted in U.S. District Court, Massachusetts. She is due to be released on Jan. 26, 2010. Sentencing for the fraud scheme has not yet been scheduled.

LoanMarket.net, Irvine, Calif., has received more investment capital including a commitment from Bill Cvengross, a founder and former chief executive at bond fund Pimco. According to LoanMarket.net principal Jeff Freud, other recent investors in the loan auction website include Richard Conn, a former equity partner at Latham & Watkins, and Bob Allison, a venture capitalist from Orange County. Mr. Freud declined to say how much money the men invested in LoanMarket.net. "They've invested in the company and are taking an active role in it," said Mr. Freud. The website currently has 600 loans listed for auction with another 1,000 or so ready to board, said Mr. Freud. Buyers of the loans must pay cash.

Three more investment funds — with combined commitments of at least $1.5 billion — have applied for and received approval from the Treasury Department to participate in the 'Public-Private Investment Program' in regard to buying troubled securities. The three are: AllianceBernstein LP and its sub-advisors Greenfield Partners LLC and Rialto Capital Management LLC; BlackRock, Inc.; and Wellington Management Company LLP. Treasury says each has completed initial closings and has at least $500 million of committed equity capital from private investors. To date, at least five funds have been established with total debt capital of $12.27 billion. So far, no PPIP sales have been disclosed publicly. Treasury says more PPIP funds will close and be announced by the end of October.

Freddie Mac is warning potential buyers of its foreclosed properties that they have to submit a bid by Oct. 30 to take advantage of its temporary offer to cover part of the closing costs. Freddie has 34,700 in real estate owned properties. To expedite REO sales the government-sponsored enterprise will put up to 3.5% of the house price toward closing costs. "Every home shopper should know there are only 30 days left to save potentially thousands of dollars in transaction costs when they buy a HomeSteps home," said Freddie vice president Chris Bowden. HomeSteps is Freddie's REO sales unit. Buyers also have to complete the closing by Dec. 31 to get the closing cost discount.