Servicing

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).

Hudson City Bancorp Inc., Paramus, N.J., charged off $9.6 million of nonperforming mortgage loans whose current values were below the outstanding loan balance during the second quarter. The charged-off loans, said Ronald E. Hermance Jr., chairman, president and chief executive, are still in the foreclosure process. These loans may or may not become real estate-owned. Even with the charge-off, Hudson City made $127.9 million, or $0.26 per share, up from $110.7 million, or $0.22 per share, for the same period one year prior. During the quarter, the company originated $1.7 billion and purchased $1.2 billion of first-mortgage loans.

Standard & Poor's Fixed Income Risk Management Services and the American Securitization Forum are creating a loan identifier and mortgage loan repository. FIRMS, an analytics unit separate from S&P's ratings business, said it will create a new loan numbering system and a central loan data repository aimed at providing investors with a means to understanding the risk, collateral and credit of an individual loan that has been securitized or may be repackaged for the secondary market. Assigned by Standard & Poor's at no cost to issuers, the unique Loan ID linked to the CUSIP and ISIN number of the security are aimed at helping investors track loans throughout their life spans and providing a chain of accountability between loan originators and investors.

Morgan Stanley took $700 million of losses on real estate during the second quarter, when it took a net loss overall of about $1.2 billion. The company saw continued improvement in its credit default spreads during the period and it was "among the first banks to repurchase TARP capital," moves "which are significant positive developments for the firm, but nonetheless had a negative impact on our results," said John H. Mack, chairman and chief executive. "Morgan Stanley would have been solidly profitable this quarter if not for these two positive developments," he said.

Pre-approval for a loan modification gives customers a much better chance of successfully going through the trial process and approval for a mod, Ken Scheller senior vice president, home retention division, Bank of America, said during a panel at SourceMedia's Best Practices in Loss Mitigation Conference in Dallas. He echoed remarks made by other executives who stressed the importance of "loan analytics" and risk evaluation at the front-end of a loan modification. The process is affected by very low customer outreach rates, which often are as low as 1%. This may be because lenders and servicers can be intimidating to borrowers. The executive said that among the biggest problems faced by lenders and servicers in today's market are that customers may be afraid to communicate with their lenders and may lack knowledge about their options. Sometimes borrowers prefer to communicate with their attorney instead of a servicer or counselor, because they value the one-on-one experience and the privacy it entails, he said. Mr. Scheller also noted that when a foreclosure is in the works there is a "sweet spot" in the first 60 days of processing before actual foreclosure when borrowers have a last chance to consider retention, and this window can be better utilized to the benefit of the borrower when an attorney is involved.

The Obama administration has sent a legislative package to Capitol Hill that strengthens supervision of credit rating agencies and improves disclosures about the risks of structured mortgage-backed securities. The administration wants ratings on structured products to have different symbols than corporate bonds allowing investors to know there is a difference between the two. Second, the rating agencies would provide a "clear report" containing assessments of data reliability, the probability of default, the estimated severity of losses in the event of default, and the sensitivity of a rating to changes in assumptions on structured products, said assistant Treasury secretary Michael Barr. The administration's proposals also are designed to discourage issuers from "shopping" for the best rating. Mr. Barr said the administration "strongly supports" a proposed rule issued by the Securities and Exchange Commission last year that requires issuers to make the same data they provide to their rating agency available to all rating agencies. This sharing of data is expected to encourage other rating agencies to provide additional, independent analysis to the market.

Thanks, in part, to last year's acquisition of Wachovia Corp., Wells Fargo & Co. doubled its residential loan production in the second quarter, including a 111% jump in fundings through correspondent mortgage bankers and loan brokers. Overall, Wells funded $129 billion in home mortgages during the period, $57 billion of which came in through third-party sources. The balance was originated through its retail branches and online. However, the company - which released record earnings in 2Q -- provided no breakdown on how much of its fundings came solely from brokers. (The TPO figure was reported as one.) Meanwhile, home equity or second-lien fundings plummeted to $1 billion during the period compared to $3 billion a year ago. Late last year the bank bought Wachovia, a large investor in payment-option ARMs. The Wachovia franchise included the bank's existing residential production unit, which had been bolstered by its 2006 purchase of Golden West Financial of Oakland, then one of the largest funders of POAs. The GWF POAs turned out to be a major headache for both Wachovia and now Wells because of soaring delinquencies. In the second quarter Wells reported residential charge-offs of $1.8 billion, a majority of which are tied to second liens. Wells has $7.6 billion in nonaccruing home loans on its books and another $7.5 billion in nonaccruing commercial loans. Wells is the nation's second largest residential servicer ($1.6 trillion) and largest commercial servicer ($470 billion), according to the Quarterly Data Report.

National Quick Sale, Jacksonville, Fla., is offering a new program to defaulting borrowers called "Short Sale Alternative to Foreclosure and Eviction." The company says the SAFE program supports the Obama administration's Home Affordable Modification Program and provides an alternative for the significant numbers of borrowers who do not qualify for a loan modification. Under the SAFE effort, the HAMP declination letter informs the borrower that their loan cannot be modified and lets them know of possible alternate solutions to undergoing a short sale. The SAFE notification directs borrowers to National Quick Sale's website or to its call center for assistance in getting their home listed, marketed and sold before the foreclosure process finalizes.

The Federal Deposit Insurance Corp.'s experiment in modifying loans at IndyMac Bank is still showing good results in terms of keeping borrowers in their homes with a low redefault rate of less than 16%. The Pasadena-based thrift failed in July 2008. As receiver, FDIC developed an innovative loan modification program to reduce the mortgage payments of delinquent borrowers down to 38% of their income. Starting in early 2009, monthly payments were reduced to 31% of mortgage DTI on new modifications. Overall, the weighted average payment reduction is 24% per loan. The bulk of the modifications were completed in the fourth quarter of 2008. As of May 31, the redefault rate on nearly 17,400 FDIC modifications was 15.6%. The redefault rate on most loan modifications completed in the fourth quarter was 27% as of March 31. Most servicers in the fourth quarter did not emphasize the importance of reducing the borrowers' monthly payments and only 37% of loan mods resulted in payment reductions of more than 10%. Unless the payments are reduced, "you are almost guaranteeing a redefault," a FDIC official said.