Servicing

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.

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.