Servicing

The Federal Deposit Insurance Corp. is conducting its first legacy loan sale, which gives investors access to affordable financing to purchase a 50% stake in a pool of residential mortgages. Investors paying cash can take an 80% equity position in the pool of receivership assets and manage the mortgages, which are being sold on a servicing released basis. Investors seeking government financing can take a 50% equity position and split any profits with the FDIC. Financing is being offered with leverage of 6-1 or 4-1 depending on certain elections. FDIC is conducting the first sale using $1 billion in assets from the failed Franklin Bank in Houston, according to a report in the American Banker. FDIC is hoping this test of the Legacy Loans Program will lead to sales of bad assets by operating banks. "This step will allow FDIC to be ready to offer the LLP to open banks as needed," the agency said.

The Treasury Department has unveiled its loan modification insurance program to protect investors from declines in house prices. The $10 billion Home Price Decline Protection program will "offset any incremental collateral loss on modifications that do not succeed" during the first two years, Treasury said. The new program is aimed at giving investors and servicers participating in the administration's Home Affordable Modification Program an incentive to modify loans in markets with declining house values. "Home price decline protection can help homeowners who may not have been reached otherwise," Treasury assistant secretary Michael Barr said. The amount of the HPDP "incentive" payment is determined at the time the servicer runs the net present value test to qualify homeowners for a loan modification trial. It is based on expected price declines over the next year and other factors. Treasury is kicking off the incentive payment program for HAMP modifications with NPV test dates on or after Sept. 1. "Mortgage loans that are owned or guaranteed by Fannie Mae and Freddie Mac are not eligible for HPDP incentive compensation," according to a Treasury directive.

Close to $500 billion or 6% of U.S. commercial mortgage-backed securities are currently in special servicing and that amount could double by the end of the year, according to Fitch Ratings. "The resources of special servicers will continue to be stretched, which will intensify scrutiny on their preparedness," said managing director Stephanie Petosa. "Compounding the problem is that many of these loans expected to default are large and complicated loans." However, Fitch said it does not expect to see the same rate of growth in CMBS delinquencies, which it expects to exceed 5% by the end of 2009.

Refinances tracked by Freddie Mac in the second quarter are expected to cut payments by about $3.4 billion in the coming year. Refinancing borrowers' new interest rates were approximately 1.25% below the old rates on average. "We are anticipating more than one-half of originations to be for refinancing throughout the rest of the year as long as rates stay their current levels of 5.25%," said Freddie Mac vice president and chief economist Frank Nothaft. In the second quarter, cashout refinancing dropped to its lowest share since the third quarter of 2003, according to Freddie's Refinance Report. Sixty two percent of borrowers with a prime credit quality conventional second-lien mortgage either kept the same principal balance or reduced it, up from a revised 57% in the first quarter. The share of refinance loans resulting in new loan amounts that were at least 5% higher than the paid-off second lien mortgage balances fell to a six-year low of 38%. The first-quarter cash-out share was revised down to 43%. "In the second quarter, about $25 billion in home equity was cashed out by homeowners when they refinanced their conventional prime-credit home mortgage. This is up a little less than $5 billion from the first quarter volume, but, importantly, the rise reflects the jump in the number of loans refinanced rather than an increase in the amount borrowers are cashing out per loan," said Amy Crews Cutts, Freddie Mac deputy chief economist.

Standard & Poor's Ratings Services has lowered several of Colonial BancGroup's ratings, citing risks linked primarily to its consent to a cease-and-desist order by its regulators. "The rating downgrade largely results from our view that regulatory risk has increased following the company's announcement that it has consented to an order to cease and desist by the Federal Reserve, its primary federal regulator, and the Alabama State Banking Department," S&P credit analyst Robert Hansen said. S&P noted that the cease-and-desist order states that the "company cannot pay any dividends or make any distributions of interest or principal on subordinated debt or trust-preferred securities without the prior written permission of these two regulators. If Colonial BancGroup is not granted permission by these regulators to make interest payments and subsequently misses an interest payment on its subordinated debt, the company's rating would be lowered [to default level]." The company's counterparty credit rating fell to CC from CCC. Its rating on the company's preferred shares fell to C from CC. And its long-term counterparty credit ratings on its subsidiaries fell to CCC- from B-. All short-term ratings on the company and its primary bank remain at C. All ratings remain on CreditWatch with negative implications.

The Senate passed a bill Thursday evening that provides the Federal Housing Administration with additional loan commitment authority so the FHA can continue to endorse single-family loans through Sept. 30 without interruption. The Senate's action clears the measure so it can be sent to President Obama for his signature. The House passed the bill (H.R. 3357) earlier in the week by a 363-68 vote. The bill provides $85 billion in additional commitment authority for FHA and $100 billon for Ginnie Mae. The Senate passed it by a 79-17 vote. The measure also includes emergency funding for the highway trust fund. FHA warned Congress back in June that it had used 75% of its $315 billion in loan commitment authority and later requested additional commitment authority to avoid a shutdown of the single-family program.

Electronic process automation vendor SigniaDocs has expanded its service offerings around electronic loan modifications. With the additional capabilities, Dallas-based SigniaDocs said it is now capable of supporting virtually any loan workout program the industry supports. Most loan modifications negotiated by lenders and servicers are finalized by paper documents sent to defaulting homeowners in a process that is currently taking from 40 to 60 days overall to complete, according to SigniaDocs. With e-modifications, the documents are prepared and posted instantaneously in a secure Web-based environment, where the borrower can be talked through their content and click to sign the documents in minutes, the company said. Data gathered by SigniaDocs is showing that 50% of e-modifications are completed the same day they are approved, and over 80% are executed within two business days.

Based on data collected as of June 30 by Lender Processing Services, Inc., new delinquencies dropped to their second lowest level in the last year and the percentage of loans rolling to a more delinquent status declined across all product types. "At current interest rates there is a lowered risk of increased defaults associated with outstanding hybrid adjustable-rate mortgage resets," LPS said in its report. "Liquidity is becoming increasingly available again to borrowers who are in some stage of delinquency. A dramatic improvement in borrower credit quality has created a significant decline in first payment defaults." In its report, LPS said total loan originations for the first half of 2009 were higher than 2008 levels for the same time. Loan originations for Jan. to June 2009 were 2,333,451 versus 2,211,852 for Jan.- June 2008. These findings from the June LPS Mortgage Monitor could be indicators that the nation's housing market may be turning a corner toward recovery. But according to LPS, foreclosure inventories continued to climb while non-current loans, including defaults and foreclosures, rose to 11.44%. Foreclosure starts in June increased 1.6%, while recidivism rates are not yet showing signs of improvement. Jumbo prime loans continue to experience the highest rates of deterioration with rates up 580% since January 2008. The total U.S. loan delinquency rate was 8.58%, a monthly increase of 1.1% and a year-to-year increase of 44%. June's foreclosure rate was 2.86%, a month-to-month increase of 2.5% and a year-to-year increase of 86.1%. States with the most non-current loans include Florida, Nevada, Mississippi, Arizona, Georgia, California, Indiana, Michigan, Ohio and West Virginia. States with the fewest non-current loans are North Dakota, South Dakota, Wyoming, Montana, Alaska, Vermont, Nebraska, Oregon, Colorado and Washington.

Lending is steady or slower and residential real estate generally remains weak with signs of improvement, according to the Federal Reserve's Beige Book. Residential real estate lending is decreasing in New York, Richmond, and St. Louis, according to the Fed. Dallas' outstanding mortgage volumes are steady but low, while Kansas City's rise in mortgages is slowing. Refinancing activity is dropping dramatically in Richmond, decreasing in New York and Cleveland, and maintaining its pace in Dallas. Credit quality is varying by district with commercial real estate concerns leading to tighter credit in some areas as generally credit standards continue to tighten or remain stable. The only district where residential real estate sales are failing to improve is St. Louis, where they instead are seeing a steep drop. The Fed said the low end of the market, particularly entry-level sales, continues to do relatively well, with some districts attributing this to the first-time homebuyer tax credit. The Boston and New York districts said condominium sales are still far below 2008 levels. Home prices continue to decline in most cases although some districts see possible signs of stabilization. Three districts said foreclosure sales are putting downward pressure on prices. Residential construction appears to remain slow, with three districts noting that financing is difficult, according to the report. Respondents said commercial real estate sales volume is low, or even "non-existent" in some districts, citing a combination of tight credit and weak demand. Tight credit also was cited as a factor in limited or declining commercial construction in most districts, exceptions being health and institutional construction in the St. Louis district, public sector construction in the Chicago district and World Trade Center reconstruction in Manhattan.

A Senate appropriations subcommittee has approved new funding for the Federal Housing Administration to hire additional staff and update its aging information systems as part of the Department of Housing and Urban Development budget for fiscal year 2010. "It provides funds to start modernizing its technology systems in order to track its mortgages and obligations, which — I regret to tell you — it cannot do right now," said Sen. Christopher Bond, R-Mo. Sen. Bond also expressed concerns about the rapid growth of the FHA program and the lack of staff and expertise to manage the FHA single-family program effectively. "It may be at the edge of a meltdown," he warned. Sen. Richard Shelby, R-Ala., expressed similar concerns. "If we don't watch out we could have another Fannie Mae or Freddie Mac," Sen. Shelby said at a subcommittee markup of the HUD appropriations bill.