Servicing

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.

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.