Servicing

Under current economic conditions, nonprime investors and lenders should expect defaults on loans currently being originated to be 137% higher than the average of loans originated in the 1990s, according to the latest UFA Mortgage Report. The Default Risk Index from the University Financial Associates in Ann Arbor, Mich., for the third quarter of 2009 rose to 237 from last quarter's revised 230, but remains below the 2008 Q4 peak. After extraordinary price declines in many housing markets around the country, the UFA says steep increases in unemployment are almost fully offsetting the positive effects of lower, and in some areas, stabilizing house prices. "As house prices return to more sustainable levels, we are transitioning to a phase where high unemployment rates will exacerbate the level and extend the period of elevated foreclosures," said Dennis Capozza, professor of finance with the Ross School of Business at the University of Michigan and a founding principal of UFA.

Outstanding foreclosures in the United Kingdom may be declining a bit but employment and industry trends suggest the performance of prime residential mortgage-backed securities market will generally continue to deteriorate, according to a Moody's Investors Service report. Moody's senior associate Daron Kularatnam attributes performance woes to a combination of increasing unemployment and lack of financing options. A Moody's index report that the senior associate co-authored shows RMBS delinquencies in the second quarter rose to 1.80%, up 18.3 basis points from the previous quarter, while outstanding repossessions "decreased marginally to 6.6 basis points on average." The report also noted that no new U.K. prime RMBS deals were issued during the second quarter.

The fair value of loans held by the nation's largest commercial banks continues to decline, indicating that credit markets have not yet turned around and raising serious questions about the effectiveness of the government's efforts to help the industry through the credit crisis. Among the banks that were stress-tested by the government in May, the difference between carrying values and fair values grew 14.4% from Dec. 31 to June 30 - to $164.4 billion. Observers said the data shows that it is getting even more difficult to find buyers for stressed loans and that banks' efforts to jettison bad assets could be delayed. And if the Financial Accounting Standards Board advances a sweeping mark-to-market proposal, some banks might have to raise more capital to close their valuation gaps. "It is clearly a sign of stress that surprises me," said Tim Yeager, a finance professor at the University of Arkansas and a former economist at the St. Louis Federal Reserve Bank. "I thought by now that we would have turned the corner, but things seem to be getting worse."

Freddie Mac soon may be receiving a notice from the New York Stock Exchange, saying it is back in compliance with the NYSE's listing requirements. At press time Freddie's common was trading at $2.22, which means that its average share price will have been north of $1 for the past 30 days - that is, as long as its stock price doesn't collapse by close of business Monday. Under NYSE rules, the exchange can initiate delisting proceedings for companies whose 30-day average price falls below $1. "We're waiting for official notification from the NYSE," a company spokeswoman said Monday. In a week it will mark the one-year anniversary since Freddie and its sister company, Fannie Mae, were taken over the government and placed into conservatorship. The share price of both GSEs has been rising over the past month. Some stock analysts attribute the price increase to bottom fishing and speculation by short sellers. Freddie's 52-week low is 25 cents, its high $5.52. In the second quarter Freddie actually posted a profit while Fannie lost money.

The nation's beleaguered mortgage insurance companies wrote $7.54 billion of new traditional MI policies in July, its third worst volume month of the year. Compared to the same month a year ago, new business fell by 39%, according to figures compiled by the Mortgage Insurance Companies of America, a trade group. July was the industry's weakest month in terms of new applications received: 44,532 -- almost half the number received in July 2008. Meanwhile, MICA reported that primary insurance defaults rose to 94,571 units in July, the second highest reading of the year for the industry. January was the worst month of the year for defaults at 106,482. The data was culled from six of the nation's seven MI companies. Triad, which is self-liquidating, is not represented in the numbers.

Guaranty Financial Group Inc., the parent company of the recently failed Guaranty Bank, Austin, Texas, has filed for bankruptcy protection, listing assets of $24.3 million and debts of $323.4 million. Guaranty Bank was also a warehouse provider to non-bank mortgage lenders, a business it was in the process of winding down when the Federal Deposit Insurance Corp. seized the lender on August 21. The agency sold Guaranty to Banco Bilbao Vizcaya Argentaria SA, Spain's second-biggest depository. "Beginning in 2007, volatility in the credit and residential housing markets resulted in extensive impairment of existing mortgage-backed securities held by GFG and its subsidiaries," the company said in its bankruptcy court papers.

The performance of home-equity lines of credit took a turn for the better in the second quarter as delinquency rates dropped but net charge-offs spiked up 30%. The Federal Deposit Insurance Corp. reported that 1.73% of HELOCs are 90 days or more past due or considered uncollectible, down 25 basis points from the previous quarter. "Noncurrent home-equity and junior-lien mortgages declined for the first time in six quarters," FDIC chairman Sheila Bair said. The noncurrent rate on closed-end second liens fell to 3.26% in the second quarter from 3.8% in the prior quarter. FDIC-insured institutions charged-off $5.1 billion in HELOCs and $2.7 billion in junior liens in the second quarter.

Next week the Federal Deposit Insurance Corp. could pick a winning bidder on $1 billion in servicing rights belonging to the now-defunct Franklin Bank of Texas. An investment banking source familiar with the transaction told National Mortgage News that "a winner will be picked a week from now." Initially 23 bidders expressed interest in the portfolio of residential servicing rights. Interactive Mortgage Advisors is auctioning the portfolio for the agency. The servicing brokerage declined to comment.

Deutsche Bank Securities is the largest unsecured creditor of Taylor, Bean & Whitaker and is owed at least $42 million, according to a supplemental filing in the bankruptcy case of the nonbank lender. A spokesman for DB had no comment at press time. The claim is labeled as "disputed" in the filing and no additional information is provided. The second largest unsecured creditor is James G. Hicks of Lawrenceville, Ga., who has staked a claim for $9 million. Mr. Hicks, however, is not listed in the telephone directory as a consumer or business. The third largest unsecured creditor is RBC capital Markets, New York, which is owed $2.2 million. Meanwhile, the Office of Thrift Supervision has hit Platinum Community Bank, owned by TBW, with a cease-and-desist order, telling it to stop unsafe and unsound practices. The C&D, which is available on the agency's website, says the depository has failed to maintain accurate books and records, has not operated independently from affiliates and is having liquidity problems. The bank issued a statement saying it's working closely with OTS to address the issues in the order. In July 2008 TBW bought controlling interest in Platinum Bankshares, the holding company of the depository. The parent was based in Rolling Meadows, Ill.

Federal Deposit Insurance Corp. officials are hoping the worst may be over for single-family mortgages but they fully expect the performance of commercial real estate loans will continue to deteriorate. The agency reported that 6.8% of single-family loans held by banks and thrifts are 90 days or more past due or considered uncollectible, a rise of 220 basis points over the past six months. FDIC-insured institutions charged-off $8.6 billion in single-family loans in the second quarter, a 15% increase from the first quarter. However, only $15.4 billion of single-family loans became "noncurrent" (as FDIC calls seriously delinquent) during the second quarter, compared to $27.3 billion in the first quarter. FDIC officials are looking for this decline to become a trend. The noncurrent rate on CRE loans hit 2.88% in second quarter, up from 2.25% in the previous quarter, and $7.1 billion in CRE loans became noncurrent during the quarter. The FDIC expects further deterioration for several more quarters.