Servicing

The nation's six active mortgage insurance firms wrote $22.89 billion worth of coverage in the second quarter, a 61% decline from the same period last year, according to figures compiled by National Mortgage News. Even though originations are on the rise, the MIs have been constrained by their weak capital positions which hurts their ability to write news business. They also have lost customers to the Federal Housing Administration's insurance program. In the second quarter MGIC Investment Corp. ranked first with $5.9 billion in coverage, followed by Radian Guaranty ($5.49 billion), and United Guaranty Inc. ($3.9 billion). UGI is for sale. Investor Wilbur Ross has been mentioned as being a leading candidate to buy the company.

Mortgage Industry Advisory Corp. is selling a $1.04 billion package of Government National Mortgage Association servicing rights backed by mortgages that are mostly located in the Northeast. The offering is yet another sign of life in the secondary market for housing receivables. The average loan size in the pool is $198,845. All of the notes are fixed rate. The seller is a mortgage banker based in the Northeast but MIAC did not identify the firm. The broker had not returned a telephone call about the offering at press time. Currently, the two largest players in the GNMA servicing market (in terms of market share) are Wells Fargo & Co., and Bank of America, according to the Quarterly Data Report.

Residential Credit Solutions is the winner of the first FDIC Legacy Loan sale involving $1.3 billion in residential mortgages from the failed Franklin Bank in Houston. RCS, a residential mortgage investor and servicer based in Fort Worth, Texas, bid $64.2 million in cash to purchase a 50% equity stake in a limited liability company that will own the troubled assets. The Federal Deposit Insurance Corp. said the pilot sale was "very competitive" and it expects to recover 70% of the outstanding balance on the nonperforming loans. "The bid received from RCS for the financed sale of assets to the LLC using 6-1 leverage was determined to be the offer that would result in the greatest return to the [Franklin] receivership of all competing bids," FDIC said. RCS will manage the LLC portfolio and service the loans under the Home Affordable Modification Program. The company could not be reached for comment.

The Internal Revenue Service and Treasury Department have issued new regulations related to certain modifications of commercial mortgages held by real estate mortgage investment conduits. The new regulations, which were not expanded to include mods of commercial mortgages held by investment trusts as some in the industry have proposed, would allow lenders to modify commercial real estate loans held by REMICs in some cases without incurring tax penalties. The IRS and Treasury Department said they would continue to consider whether the new regulations should also be expanded to investment trusts. The Real Estate Roundtable has been a proponent of the REMIC change.

The downgrade of the insurer financial strength and issuer default ratings of Fidelity National Financial Inc., Jacksonville, Fla., by Fitch Ratings, Chicago, means the rating agency has downgraded three of the four remaining national title underwriting groups in the past week. Fitch cut FNF's IDR by two notches, from "BB" down to "B+". The two-notch downgrade, the Fitch report said, reflects not only the IFS cut on FNF's title insurance subsidiaries, but the greater weight given the substantial amount of goodwill at the holding company level. FNF has a debt-to-tangible capital ratio of 44% as of June 30, which Fitch categorized as outside its expectations. A positive is that FNF reduced financial leverage by paying down debt after an equity offering in April 2009. The IFS downgrade affects all FNF title subsidiaries except the former LandAmerica operations. The rating was dropped to BBB- from BBB. Fitch feels FNF has an aggressive capital management strategy, resulting in a higher operating leverage at the underwriting units than its competition. Despite this, Fitch retains an investment grade IFS rating on FNF in recognition that its historical results through the first half of this year have been better than its competition's. Another positive is that FNF now has a 46% market share, thanks to the LandAmerica acquisition.

In order for Radian Group to continue writing new mortgage insurance policies in 2010 and beyond, the company is considering a number of alternatives, including reactivating a subsidiary, said chief executive S.A. Ibrahim. Speaking at the Barclays Capital Global Financial Services Conference, he said the company is exploring the use of its Amerin Guaranty subsidiary to write new business in the 14 states that have risk-to-capital limits if necessary. The company supports industry efforts for regulatory or statutory relief by reducing the 25-to-1 risk requirement in those states. Among the states where such action has recently occurred is Arizona. Radian is also evaluating its reinsurance relationships in order to reduce its risk-to-capital ratio. As of June 30, Radian was in compliance with a risk-to-capital ratio of 15.9-to-1. But, Mr. Ibrahim said, this ratio is sensitive to future defaults, so it has the two initiatives underway. Depending on regulatory approval, one or both can be in place. When asked by an attendee why loans are less likely to cure in this downturn than in the past, Mr. Ibrahim said his opinion was that the decline in home values removed the opportunity for a borrower in trouble to have the ability to sell the property and get out of trouble.

Fannie Mae has named former PHH Mortgage chief Terry Edwards — who steered that nonbank through the worst of the mortgage crisis — as its new EVP in charge of portfolio management. At Fannie he will focus on the GSE's foreclosure prevention and loss mitigation activities for its single-family book of business. Until a few months ago Mr. Edwards was PHH's CEO but when a new control group — led by former Freddie Mac CEO Greg Parseghian — took charge of PHH he found himself serving only as a consultant. (PHH is a top ten ranked lender/servicer.) Even though subprime and alt-A lending boomed from 2003 to 2008 PHH stood mostly on the sidelines, concentrating on GSE and FHA lending. PHH is the nation's largest private label funder/servicer.

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.