Servicing

FHA is giving its servicers a directive to lower mortgage rates on loan modifications after finding too many borrowers ended up with higher payments. In the past, FHA allowed servicers to increase the interest rate when it was appropriate. But now that interest rates have come down, "FHA is not really happy with what they are seeing," said Bob Lyons, a servicing consultant with Lyons and McCloskey in Fairfax Station, Va. A new mortgagee letter (2009-35) directs FHA servicers to reduce the interest rate on newly modified loans to a rate that is not more than 50 basis points above the Freddie Mac Weekly Primary Mortgage Survey rate. The FHA mortgagee letter also directs servicers to extend the term of the new mortgage so the borrower has 30 years to pay it off. To qualify for incentive payments, "the modified loan must meet the term and interest rate requirements prescribed in this mortgagee letter," according to the letter signed by FHA commissioner David Stevens.

The benchmark 10-year Treasury yield slid below 3.30% Tuesday afternoon, putting downward pressure on longer-term rates. A little less than a week ago, the 10-year yield was as high as 3.50%. Some analysts believe long-term mortgage rates could hit record lows again this year but others say the Federal Reserve's phasing out of its rate-lowering MBS purchases will gradually put upward pressure on mortgage rates.

Distressed mortgage investor Kondaur Capital, Santa Ana, Calif., is open to the idea of buying a bank, according to a company spokesman. Earlier in the year Kondaur seriously considered such a move because it would allow the firm to "competitively acquire performing loans with low-cost bank capital," said the spokesman. He said Kondaur is still "exploring the possibilities" but has nothing more specific to report. Launched a few years ago Kondaur is managed by Jon Daurio, its CEO, and John Kontoulis who serves as president. During his career Mr. Daurio has worked for Encore Credit, The Prieston Group, and other firms.

Marshall & Ilsley Corp., a top 40 ranked residential servicer, said it is extending its moratorium on foreclosures by another 90 days. The new moratorium means struggling home owners have until December 31. (The bank first initiated a moratorium in late December 2008.) The Milwaukee-based depository is the parent of M&I Mortgage, Cedarsburg, Wisc., a $10.4 billion residential servicer. The moratorium applies only to owner-occupied residential loans for customers who work to reach a repayment agreement. Loans in all the bank's markets are eligible.

Home prices rose 1.6% in July following a 1.4% increase in June as the Standard & Poor's/Case-Shiller 20-city house price index registered its third monthly increase — the first such increase since mid-2006. The chairman of S&P's index committee David Blitzer noted that prices increased in 18 of the 20 cities in July. Prices declined in Seattle and Las Vegas. In addition, 13 of the cities have seen price increases for least three consecutive months. "These figures continue to support an indication of stabilization in national real estate values, but we do need to be cautious in coming months to assess whether the housing market will weather the expiration of the federal first-time homebuyer tax credit in November, anticipated higher unemployment rates and a possible increase in foreclosures," Mr. Blitzer said. Overall, prices are down 13.3% from a year ago and down 32.6% from the second quarter 2006 peak in home prices. Economists at Moody's Economy.com expect house prices won't bottom out until the second quarter of 2010. By then the peak-to-trough decline in the S&P/Case-Shiller HPI will be 40%.

The serious delinquency rate on Fannie Mae guaranteed single-family loans topped 4% in July, according to mortgage giant's monthly summary report. The percentage of Freddie loans 90 days or more past due and in foreclosure hit 4.17% in July, up 23 basis points from June. A year ago, the government sponsored enterprise had a 1.45% serious delinquency rate. Freddie Mac recently reported that it has a 3.13% serious delinquency rate. In its second quarter financial report, Fannie said default rates are increasing across its entire guaranty book of business and the serious delinquency rate on its $270 billion Alt-A portfolio hit 11.9% as of June 30. The Alt-A portfolio includes $195.9 billion interest-only loans and $15.4 billion of payment option ARMs. Fannie's monthly report also shows that the GSE issued $62.1 billion in mortgage-backed securities in August, down 22% from July. Fannie has a one-month lag in reporting its delinquency rate. Freddie's 3.13% delinquency rate is for August.

Loan Resolution Corp., Scottsdale, Ariz., said it has hired 50 new employees because demand for its short-sale services is skyrocketing. LRC said the new hires were added in the third quarter. The company also said it is relocating its headquarters to a larger 30,000 square foot space in another office building. "The explosive growth of our company is a direct result of the added demands from servicers," said company chief operating officer Travis Olsen.

As 'negative equity' increases home owners are increasingly likely to default on their mortgages — even if they can afford to pay them, according to a recent academic study. Research conducted by Northwestern University and two other colleges found that homeowners who bought more than five years ago are less likely to default. They also found that "young people" are less willing to walk away, a finding they call surprising. "The young are more dependent on the loans market and thus face higher reputation costs from defaulting," they write. When a household that can still afford to pay the mortgage purposely hands in the keys it's called a "strategic default." The study says that "no household" is willing to default if the equity shortfall is less than 10% of the value of the home — but when the underwater position reaches 50% (which has occurred in some markets, notably Florida and Nevada) then 17% of consumers will engage in a strategic default. Researchers Luigi Guiso, Paola Sapienza and Luigi Zingales write that 80% of "people think it is morally wrong to do a strategic default." The authors add that even "amoral people can choose not to default when it is in their narrow economic interests to do so because of the social costs this decision entails."

The nation's housing market might be best served by creating up to 20 housing GSEs, according to a recent report by the Congressional Research Service. The CRS, however, is not promoting one option over another but instead weighs the benefits of several different ideas concerning the future of Fannie Mae and Freddie Mac. CRS notes that 20 housing GSEs could fall under financial stress at the same time but says one way to avoid this is to assign each a specific geographic region or have them "specialize in certain types of housing such as condominiums or multifamily rental housing." Next year the Obama Administration is expected to unveil its proposals on Fannie and Freddie. Since the third quarter of 2007 Fannie has posted net losses of $102 billion, Freddie $63 billion.

Two additional mortgage vulture funds went public this week — both as REITs — but their IPOs failed to catch fire with investors. Colony Financial Inc., Los Angeles, sold 12.5 million shares, raising $250 million. Apollo Commercial Real Estate Finance, New York, sold 10 million shares and raised $200 million. Both are trading in a tight range with somewhat light volume. The two were formed to buy distressed mortgage assets, in this care, commercial-related notes. The deals were originally scheduled to price on Tuesday, but were postponed until later in the week. This past summer PennyMac Mortgage Investment Trust of Pasadena, Calif., went public, raising about $320 million, about half of what it was hoping for. PennyMac invests in, and services troubled residential loans. Sources tell National Mortgage News PennyMac has looked at several portfolios but has only wound up buying a few.