Servicing

UBS during the second quarter still was working on reducing monoline insurance risks that can be traced partially back to U.S. residential real estate finance exposures, but it said in an earnings report that as of July it had agreed to commute certain trades with insurers, mitigating those bond insurance risks. Monoline risk exposures, about one-third of which were linked to credit protection on subprime and other U.S. residential mortgage-backed security collateralized debt obligations, were among "identified risk concentrations" listed in the company's first-quarter financials. But UBS said that during the period and in July it "agreed to commute certain trades with three monoline insurers which significantly decreased remaining exposures." During the second quarter, UBS took a loss of 1.4 billion Swiss francs ($1.3 billion). This was greater than the net loss of 395 million Swiss francs ($372 million) seen during the same period last year but an improvement over the loss of 1.97 billion Swiss francs ($1.86 billion) seen in the first quarter. The company said its second quarter loss "was driven by lower losses on risk positions now exited or in the process of being exited by the investment bank" and "significantly affected" by charges for own credit on financial liabilities designated at fair value, restructuring and goodwill impairment charges in relation to the sale of a unit.

Barclays PLC saw a $1.1 billion loss on its U.S subprime loans during the first half of 2009 but the London banking company still generated £2.98 billion ($5.05 billion) in pretax profit for the period. Overall, Barclays saw about £4.68 billion ($7.93 billion) in total gross losses due largely to real estate and mortgage-related writedowns. The company said in its interim results that £1.44 billion ($2.44 billion) of the losses stemmed from commercial real estate, £654 million ($1.11 billion) came from U.S. subprime credit residential mortgages, £549 million ($930 million) stemmed from monoline insurer-wrapped commercial mortgage-backed securities, £398 million ($674 million) came from alternative-A credit residential mortgages and £256 million ($434 million) came from monoline-wrapped U.S. residential MBS.

Even though Radian Group Inc. had a mortgage insurance provision of $142.8 million because of higher delinquencies, the company still saw net profits of $231.9 million ($2.82 per share) for the second quarter. For the same period last year, the Philadelphia-based company lost $392.5 million ($4.91 per share). Still mortgage insurance claims paid of $167.7 million were lower than Radian forecast. For the third quarter, the company said it expects between $275 million and $300 million in mortgage insurance claims; for the full year, it predicts $1.1 million, down from between $1.2 million and $1.4 million. Radian wrote $5.5 billion of primary new insurance during the quarter. The company trumpeted the fact that nearly all of it was prime quality, with 98.4% having a credit score of 680 or higher. Furthermore, in the 2009 book of business, Radian said there has been a significant decrease in the number of early payment defaults, which shows it has improved its underwriting. The mortgage insurance segment had net income of $13 million, compared with a net loss of $434 million one year ago. Radian's most profitable segment was its financial guaranty business, with net income of $215.7 million, up from $32.5 million for the second quarter of 2008. As of June 30, Radian had a primary insurance default rate of 14.84%, compared with 8.36% on the same day in 2008. Persistency as of the end of the second quarter 2009 was 87%, up from 81.2% a year ago.

Fitch has downgraded 270 bonds from 59 residential mortgage-backed securities transactions to "D." Forty-nine of the transactions are second-lien deals and the rest of the transactions are "scratch and dent" or subprime deals. All of the bonds had previously had CC or C ratings, indicating a default was expected. A D rating indicates a principal writedown has occurred.

Often pointed to as the poster child for real estate excess, the Las Vegas housing market is showing some signs of improvement, local agent Rob Jenson reports in his monthly market study. "Lower interest rates and a drop in the average sales price to under $158,500 for homes priced under $1 million is attracting more bargain-hunting foreclosure and short sale buyers," says Mr. Jenson, whose Jenson Group flies under the Re/Max banner. The recent spate of sales in Sin City's lower price ranges has brought down the inventory to a healthy 5.9-month supply. And if houses under contract are subtracted, the supply drops to 3.1 months. That's the good news. The bad news is that more than four out of five sales are still distressed deals, with foreclosures outselling short sales, seven-to-one, even though there are four times more short-sale properties on the market as REO. Overall, there were nearly 19,000 listings on the market in July, according to Mr. Jenson's "Las Vegas Real Estate Market Report." Some 3,300 properties sold in the month — 2,750 of them under duress — at an average price of $158,392, a drop of $84,620 from July a year ago.

The banking industry has to do a "much better" job of preventing foreclosures, according to Sen. Richard Durbin, D-Ill. He wants servicers to stop foreclosure proceedings when homeowners are seeking a loan modification. "I am asking servicers to make a commitment that they avoid scheduling a foreclosure on any homeowner who is actively working in good faith on a loan modification that is fair, responsible and sustainable," Sen. Durbin said in a speech at the Center for American Progress in Washington. In a letter to the 34 servicers participating in the administration's Home Affordable Modification Program, the high-ranking Senate Democrat also is asking servicers 20 questions about their efforts to help homeowners avoid foreclosures. Sen. Durbin made it clear that he is not impressed with servicers' efforts so far and he said the administration's goal of getting 500,000 homeowners into trial HAMP modifications by Nov. 1 is "easily attainable." The Illinois senator put the industry on notice, however, that he is willing to make another try at passing a bankruptcy cramdown bill if they "don't make real progress in reducing the number of avoidable foreclosures." But he indicated such a legislative drive is not imminent. "I am afraid it is going to take a lot more misery to move a lot more votes," Sen. Durbin said.

The Treasury Department said the 38 servicers participating in the Home Affordable Modification Program are conducting more than 235,000 trial modifications and released its first monthly report on each servicer's performance. "Today's report discloses performance on a servicer-by servicer basis in order to increase transparency for participating institutions. The data show that servicer performance is uneven," Treasury said. The report rates servicer performance in terms of trial modifications started in relation to the size of their portfolio of eligible loans that are 60-days or more pass due. Saxon Mortgage Services ranks highest with 25% of its delinquent loans in 90-day trials, while Bank of America is conducting modifications on only 4% of its delinquent loans. Bank of America has 27,600 loans in trials, compared to 21,100 trial modifications at Saxon. JPMorgan Chase Bank has a 20% performance ratio with 79,300 loans in trials. Despite the disparities, Treasury said HAMP is "on track" to meet the Obama administration's three-year goal of modifying 3 to 4 million loans.

The latest results from London-based HSBC Holdings PLC show its mortgage business in the United States and two other regions improving in some respects, but runoff of troubled legacy assets still leaves U.S. operations with net losses. HSBC USA Inc. generated $59 million in residential mortgage banking revenue in the three months ended June 30, up from $14 million during the same period a year ago. But the unit as a whole netted a loss of $249 million for the second quarter that was greater than the $174 million loss it took in the second quarter of last year. Its HSBC Finance Corp. unit, which discontinued its real estate-secured lending earlier this year and suffers from its past subprime lending activity, took about a $5.96 billion net loss during the three months ended June 30, compared to approximately $1.44 billion during the same period a year ago. The global banking company as a whole, which reported interim results for the first six months of this year, generated a $5.02 billion profit. This was down 51% from the same period a year ago. North America was the only one of the six world regions the company does business in that did not generate a profit. In addition to the mortgage banking revenue gains noted by HSBC USA, the company said it has seen positive mortgage market developments in the United Kingdom and Hong Kong, where there have been market share gains.

GMAC Financial Services, New York, had an after-tax net loss of $3.9 billion for the second quarter 2008, which includes a $1.6 million loss on the disposition of international mortgage assets and provisions, impairments and reserves on U.S. mortgage assets. The mortgage operations reporting segment had a net loss of $1.84 million compared with a net loss of $1.76 million in the second quarter of 2008. U.S. mortgage loan volume was $18.5 billion, up from $13.2 billion in the first quarter 2009 and $17 billion in the second quarter 2008. GMAC Financial is the parent of Residential Capital LLC; the segment results include the mortgage activity at Ally Bank and ResMor Trust. The international assets sold consisted of ResCap's operations in Australia and Spain. The parent company's net loss includes a $1.2 billion tax charge as part of the conversion from a partnership into a corporation.

Federal regulators are starting to put pressure on banks to recognize losses on second liens in markets where the first mortgage is underwater due to declining house values. "Failure to timely recognize estimated credit losses could delay appropriate loss mitigation activity, such as restructuring junior lien loans to more affordable payments or reducing principal on such loans to facilitate refinancing," the Federal Deposit Insurance Corp. says in a letter to banks. House Financial Services Committee chairman Barney Frank, D-Mass., and Senate Banking Committee chairman Christopher Dodd, D-Conn., recently urged the regulators to stop allowing banks to carry home equity loans at inflated values. "Carrying these loans at potentially inflated values may contribute to resistance on the part of servicers to negotiate the disposition of these second liens," the chairmen say in a July 10 letter. The FDIC Financial Institution Letter reminds banks of 2006 interagency guidance that says delaying recognition of losses on second liens in declining markets is an "inappropriate" accounting practice.