Servicing

Obama administration officials want servicers to pick up the pace of loan modifications and qualify at least 500,000 homeowners for 90-day trial modifications by Nov. 1, according to Treasury Department and HUD officials. "The administration has established a goal of reaching half a million modifications," HUD secretary Shaun Donovan said after meeting with servicers that are participating in the President's Making Home Affordable program. "I am confident that the best practices shared today, combined with more transparent reporting methods, better communication among all parties, and a strong commitment from servicers, will ensure that we can ramp up the MHA program's pace to meet these ambitious goals," secretary Donovan said. Servicers already have over 200,000 borrowers on trials to see if they can make three monthly payments on time, which is required before a modified loan can be finalized. The July 28 meeting allowed servicers and administration officials to exchange ideas on how to improve the modification program, said Paul Leonard, vice president at the Financial Servicers Roundtable Housing Policy Conference. He noted that servicers suggested the creation of a universal web portal would helpful so homeowners could in-put their information and speed processing for servicers. "That is one of the issues they will keep working on," Mr. Leonard said. "We hope these kind of meetings will continue," he added.

Two-thirds of the 94,000 foreclosure sales in June involved properties previously financed by prime mortgages as the tide of subprime foreclosure sales has declined over the past four quarters, according to the Hope Now alliance. The alliance's monthly report shows the foreclosure sales involving subprime loans crested in the second quarter of 2008 and foreclosure sales involving prime loans have surged since the expiration of several moratoriums in March of this year. Prime foreclosure sales hit 154,000 in the second quarter, up 36% from the first quarter. Prime sales totaled 62,600 in June, up 13% from May and 50% from April. Meanwhile, the Hope Now servicers completed 96,000 loan modifications in June, down 5% from the previous month. This marks the second monthly decline as servicers put more modification candidates through a 90-day trial period as required by the Obama administration's Home Affordable Modification Program. Most of the Hope Now servicers have signed up for President's program but some are waiting for permission from their investors to modify loans.

About 30% of payment option adjustable rate mortgages are already seriously delinquent and a congressional watchdog agency expects defaults and foreclosures will only get worse next year. "We are particularly concerned about payment-option ARMs because so many are recasting and becoming less affordable to those homeowners," said William Shear, a director at the General Accountability Office. Mr. Shear testified before the Joint Economic Committee on a just-released GAO report that shows that 44% of the 837,000 POAs originated from 2000 and 2007 have prepaid and only 30% or 250,000 loans are current. The terms of POAs generally recast after five years but the recast can be moved up because of negative amortization. Louisiana State University finance professor Joseph Mason warned the committee defaults on POA could cause foreclosures to peak in 2010 and keep the foreclosure rate elevated into 2011. Meanwhile, option ARMs are difficult to modify because the borrowers already enjoy very low payments (due to the minimum payment option). However, the re-default rate on option ARMs is "much lower" than modifications on other alt-A mortgages, according to a Bank of America/Merrill Lynch Research report.

House Financial Services committee chairman Barney Frank, D-Mass., is urging bankers to work with him on historic regulatory reform legislation, which, he says, Congress will deliver to President Obama by the end of the year. "They should accept the reality of this regulation and work with us," Rep. Frank said during a speech at the National Press Club. The House Financial Services Committee chairman noted several changes to the Obama administration regulatory reform plan that he is considering to make the proposal more acceptable to Congress and the industry — including scrapping the requirement that all mortgage lenders offer "plain vanilla" products. But he stressed that Congress is going to pass legislation that restricts leverage at large institutions, curtails excesses in derivatives markets, requires some risk retention in securitizations and sets up a single, effective agency to protect consumers. "Those are all going to happen," Rep. Frank said, and opponents of reform "can't stop it."

There were foreclosure filings on 13,664 properties in New York during the second quarter, representing a 15% decrease compared to the second quarter of 2008 and a 24% increase over the first quarter of the year, well above the national increase of 11%. Orange County, with 643 filings, had an increase of more than 61% from the first quarter, according to the latest data from the New York State Banking Department and RealtyTrac. It also had the highest ratio of filings in the state. One out of every 208 Orange County households had a foreclosure filing in the second quarter. Nearby Rockland and Putnam were also in top five counties based on the ratio of households impacted, with one in 264 and one in 272 homes experiencing a filing in the second quarter. The three counties, home to many New York City commuters, represent the spread of foreclosures outside of the immediate metro areas. Only 25 of the 62 counties in the state saw decreases in filings in the second quarter compared to the first quarter. Nassau County saw a sharp increase of 95% over the first quarter. Suffolk County remained relatively flat with a decrease of almost 2%. "It's a positive sign that most counties experienced a decrease in foreclosure activity from a year ago, but it would be concerning if the elevated quarter-over-quarter increases we saw in the second quarter continue in the second half of the year," said Rick Sharga, RealtyTrac senior vice president.

Private mortgage insurers have developed a "second look" program that will pay advance claims to facilitate modifications of insured non-GSE loans. The program is designed to rescue distressed mortgages that have flunked a net present value test and could be on the road to foreclosure. "As constructed, many NPV models disadvantage loans with mortgage insurance, making it mathematically appear that foreclosure is the best path," according to the Mortgage Insurance Cos. of America. "Under the Second Look program, loans that fail the NPV test are reviewed by the mortgage insurer to determine if it can provide an advance claim payment and permit the loan to be modified," MICA executive vice president Suzanne Hutchinson said. This MI program does not apply to mortgages owned or guaranteed by the government-sponsored enterprises. The trade group did not offer any estimates of how many homeowners the Second Look program could help. MICA recently reported that mortgage insurers, working with servicers, were able to save almost 100,000 people in 2008 from losing their homes.

The homeownership rate appears to have stabilized at 67.4% after falling for three consecutive quarters and the number of vacant homes for sale has dropped by 14% since the start of this year, according to a government report. The Census Bureau reported that the number of vacant homes on the market fell to 1.92 million in the second quarter, down from 2.23 million at yearend 2008. The homebuilders have been waiting for this inventory to drop back to its historical norm of 1.25 million to 1.5 million, because the overhang puts downward pressure on new home prices. The Census Bureau also reported that the U.S. homeownership rate edged up to 67.4% in the second quarter from 67.3% in the first quarter. In the second quarter of 2008, the homeownership rate was 68.1%. Meanwhile, the homeownership rate for blacks was 46.5% in the second quarter, down from 47.8% a year ago, while the homeownership rate for Hispanics was 48.1%, down from 49.6% a year ago.

Freddie Mae has retained Stewart Lender Services to help several hard-pressed servicers keep up with the demand for loan modifications on Freddie-owned mortgages. A Stewart subsidiary, Home Retention Services, will assess the eligibility of delinquent borrowers for Home Affordable Modifications or other possible workouts and process borrowers' information for the servicers' review and approval. "By using Home Retention Services' staff and resources, we can ease some of the pressure on our servicers' staff while helping more borrowers pursue a mortgage workout," Freddie senior vice president Ingrid Beckles said. Servicers are under pressure from the Obama administration to increase their capacity and pick up the pace of loan modifications. Home Retention Services will work with the borrower, assess their eligibility for a modification, complete the documentation and income gathering processes, and advise the borrower of their proposed modified payment, according to Freddie.

Senate Banking Committee chairman Christopher Dodd, D-Conn., wants HUD and the Treasury Department to investigate allegations by a consumer attorney that servicers are demanding upfront payments for loan modifications and violating other provisions of the Obama administration's Home Affordable Modification Program. In a letter to Treasury secretary Timothy Geithner and HUD secretary Shaun Donovan, Sen. Dodd highlighted allegations made by National Consumer Law Center attorney Diane Thompson in testimony before the banking committee. Ms. Thompson testified that some servicers are requiring homeowners to waive all claims and defenses in order to apply for a modification review. Servicers also are denying reviews to borrowers who are not yet in default, she said. "If true and widespread, abuses of this kind threaten to undermine the effectiveness of the HAMP program and deny the relief on which so many Americans are depending for their financial stability," Sen. Dodd says in a July 23 letter.

The residential mortgage banking segment at PNC Financial Services Group, Pittsburgh, earned $88 million in the second quarter 2009, down from $221 million in the fist quarter of the year. The company blamed lower net mortgage servicing rights hedging gains and reduced loan sales revenue for the decline. Loan originations for the quarter were down slightly from the first quarter, $6.4 billion vs. $6.9 billion in the linked period. Refinancings caused the mortgage servicing rights portfolio to decline from $168 billion at the end of the first quarter to $161 billion as of June 30, 2009. PNC had net charge-offs during the quarter of $795 million, an increase of $364 million over the first quarter. Nonperforming assets as of June 30, 2009 were $4.5 billion, an increase of $1 billion over the first quarter. The increase consisted of $400 million for residential real estate loans and a $400 million increase in nonperforming commercial real estate loans (mainly residential real estate projects).