Servicing

The Federal Reserve, in its new Beige Book report, says home sales are increasing somewhat in the Boston, Chicago, Richmond and San Francisco districts but the housing sector in general is not out of the woods yet. The St. Louis area has seen no noticeable improvement in housing conditions and most Fed districts reported that sales were "below the levels of a year earlier." The central bank noted that housing demand "remained stronger at the low-end of the housing market." As for home construction, the news is bleak with only Chicago and Dallas reporting small increases in housing activity. In the commercial real estate market, construction remained at low levels overall, "although Chicago and Dallas reported a small increase in activity" the Fed said. Overall, the central bank said economic activity is stabilizing or improving in the vast majority of the country and that the worst recession since the 1930s may be over.

Fitch has revised the status of Capmark Finance Inc.'s commercial mortgage-backed securities servicing ratings to Rating Watch Evolving from Rating Watch Negative, citing a put option agreement to sell its servicing and origination operations to Berkadia III LLC. Fitch also said the rating may change "depending upon whether the transaction is completed." The company's CMBS servicing ratings are as follows: primary servicer, CPS2-; master servicer, CMS2-; special servicer, CSS2-. Fitch said it is closely monitoring Capmark. As of June 30, its total servicing portfolio consisted of 35,507 loans with an unpaid principal balance of $270.1 billion, of which $131.1 billion were CMBS.

Delinquency rates are continuing to increase for all commercial/multifamily mortgage investor groups, according to the most recent Commercial/Multifamily Delinquency Report from the Mortgage Bankers Association. The economic recession drove the latest surge in commercial and multifamily delinquency rates during the second quarter, said Jamie Woodwell, MBA's vice president of commercial real estate research. Between the first and second quarters, the 30-plus day delinquency rate on loans held in commercial mortgage-backed securities rose 2.04 percentage points to 3.89%. The 60-plus day delinquency rate on loans held in life company portfolios rose 0.03 percentage points to 0.15%. The 60-plus day delinquency rate on multifamily loans held or insured by Fannie Mae rose 0.17 percentage points to 0.51%. The 90-plus day delinquency rate on multifamily loans held or insured by Freddie Mac rose 0.02 percentage points to 0.11%. The 90-plus day delinquency rate on loans held by FDIC-insured banks and thrifts rose 0.64 percentage points to 2.92%. "Lower levels of employment, the pullback by consumers and other aspects of the slowdown translated into a difficult operating environment for many income-producing properties. That in turn has led to increased stress on the loans those properties support," Mr. Woodwell added.

Foreclosure filings decreased nearly 1% compared to July, according to the RealtyTrac August 2009 U.S. Foreclosure Market Report, but when compared to the same month of 2008 filings increased by 18%. Nevada remains at the top of the chart with one in every 62 housing units seeing a foreclosure filing in August. When compared to the same month in 2008 the number of properties receiving foreclosure filings in Nevada is 53% higher, however, the state saw a higher than national average decrease of 8% when compared to July 2009. "The August report demonstrates that there is still an ample supply of properties filling the foreclosure pipeline even while the outflow of bank-owned REO properties onto the resale market is being more carefully regulated," says RealtyTrac CEO, James J. Saccacio. "After hitting a high for the year in July, REOs dropped 13% in August, but we also saw a record high number of properties either entering default or being scheduled for a public foreclosure auction for the first time." The RealtyTrac data indicates foreclosure filings, default notices and bank repossessions may have reached a plateau as more bank-owned properties are sold at market-adjusted prices.

Genworth Financial, which operates the nation's fourth largest mortgage insurer, said it is seeing a decline in delinquencies in such hard hit states as Arizona, California, Florida, and Nevada. Speaking at an investor conference in New York, company chief financial officer and senior vice president Patrick Kelleher said Genworth's improvement is coming from a variety of factors, including active loss mitigation. Its MI business, he noted, is the company's "biggest source of pressure." Even though there is improvement in the four "sand states," the company is seeing an increase in delinquencies on prime products. "These trends are what we would expect, given the historic relationship between rising unemployment and delinquencies." The company's stock has made a strong comeback over the past two months and at deadline was trading at just over $10 compared to a 52-week low of 70 cents.

PMI Mortgage Insurance Co., Walnut Creek, Calif., said Arizona legislation that gives state regulators discretionary authority over MI firms in the event they do not meet the state's required minimum policyholder position to write new business would help it as well as its competitors. PMI is domiciled in Arizona and is regulated by the state's Department of Insurance. The company said the bill, which becomes effective in November, recognizes that minimum policyholder position (MPP) should not be the only factor used to evaluate a mortgage insurer's ability to write new business. PMI noted there are 16 states that have a maximum risk-to-capital ratio or MPP. Although the Arizona bill may benefit PMI the most, the capital standard for the state can apply to all MI firms that underwrite policies there.

The use of knowledge qualifiers in representations and warranties by originators, sponsors and issuers of mortgage-backed securities may be one of the reasons residential MBS investors remain wary of the market, according to Digital Risk, Maitland, Fla. The analytics and advisory company has asked the American Securitization Forum, which is in the midst of a project aimed at restoring investor confidence in the market, to issue a guideline recommending against their use. The knowledge qualifiers, which limit what the parties involved represent to have information about, discourage thorough risk mitigation policies and procedures, Digital Risk said.

U.S. payment option adjustable-rate mortgages set to see their rates recast over the next two years represent $134 billion in loan volume, according to Fitch, New York. Fitch said of the $189 billion in securitized option ARMs outstanding, 88% have not been through a recast event. The rating agency, which has rated about 5% of option ARM deals, said that of the loans yet to experience a recast event, 94% have used the minimum monthly payment to allow the loans to negatively amortize, allowing the loan balance to grow over time to caps that generally range between 110% to 125% of the original mortgage. A recast event generally occurs when the loan reaches that cap or has been outstanding for five years, at which point the borrower is obliged to stop making minimum payments and to instead make regular, fully amortizing principal and interest payments. This potentially creates payment shock for borrowers as the size of the fully amortizing P&I payment is on average 63% higher than the minimum monthly payment many borrowers have been making. Fitch expects this to put stress on recent vintage option ARM borrowers, creating expected losses that range from 35% to 45%, depending on collateral quality. Many option ARMs are secured by properties in states where values have declined by an average 48% since the second quarter of 2006. Even if these declines cease, Fitch believes the fact that many of these borrowers will be unable to refinance into alternative mortgages will cause a spike in option ARM defaults. Even though the origination of payment option ARMs has ground to a halt, the loans must still be serviced. As recently as the fourth quarter of last year Wachovia Mortgage - which is now part of Wells Fargo - was still originating the loans but did not offer the negative amortization option. In 3Q it funded $1 billion in POAs but by the fourth quarter originations had plummeted to just $40 million, according to the Quarterly Data Report.

The major mortgage servicers are preparing for the Treasury Department to roll out a short sale program and they are signing up vendors that specialize in handling these difficult real estate transactions that help troubled homeowners avoid foreclosure. Loan Resolution Corp. chief operating officer Travis Olsen said one of the top 10 servicers has hired his firm to manage the short sale process. "We will take their borrowers who have been denied a home retention plan and hand-hold them during the rest of the process," he said. The COO also noted that his Scottsdale, Ariz.-based pre-foreclosure asset-management company has received requests for bids from several top-five servicers. Treasury is expected to provide incentives for servicers to conduct short sales and share some of the costs of paying off second lien holders. "The final details of the [short sale] program are being finalized, and will be announced as soon as completed," HUD assistant secretary David Stevens told a congressional panel on Wednesday (Sept. 9). In a short sale, the lender agrees to accept a loss on the sale of the property and forgive the remaining balance on the mortgage. If a short sale doesn't work, the next stop is foreclosure. It usually takes LRC a couple of days or weeks to complete a short sale after the buyer makes an offer, while the timeline for servicers can be 60-120 days. "We can sometimes approve short sales the same day the offer is received," Mr. Olsen said.

U.S. subprime asset values may be showing some early signs of stabilizing along with U.S. home prices, according to a report by Fitch Solutions, New York. Fitch said its total market U.S. subprime index as of the beginning of this month was 8.34, which was higher than its all-time low of 7.27 seen in May, but was still significantly lower than its opening value of 42.56 on in November 2007. Fitch managing director and author of the report, Thomas Aubrey, said his company — which is introducing five new asset-backed securities credit default swap indices — has found that the synthetic subprime market is still seeing more activity than its cash equivalent and is still being looked to as a proxy for asset values.