Servicing

Though the banking industry has a strong chance of defeating the Obama administration's call to eliminate the thrift charter, its arguments for defending it appear weaker than ever. According to a report in American Banker, two of the primary reasons for preserving the charter — stronger preemption powers and broader interstate branching rights — appear headed for the chopping block, and the third — a focus on mortgage lending — is now increasingly suspect. Many observers doubt the wisdom of keeping a charter that focuses primarily on real estate lending, arguing that thrifts caused the savings and loan crisis and helped fuel the current crisis. "Why do you need it?" said Chuck Muckenfuss, a partner at Gibson, Dunn & Crutcher LLP. "It has certain restrictions in it, and so why not just make it one better charter in which you can do whatever you want to do? That's pretty compelling."

Dyck-O'Neal of Arlington, Texas, a national debt collection agency, has been slapped with a cease and desist order by regulators in Georgia for engaging in loan brokering/lending activities without a license or obtaining the proper exemption. At press time the company had not returned a telephone call about the matter. Among its many services, Dyck-O'Neal purchases and serves as a collection agent on first and second mortgage liens.

The 30-day delinquency rate on "open-end" home equity lines of credit jumped 43 basis points in the first quarter to a record high of 1.89% on a seasonally adjusted basis, according to an American Bankers Association survey. The delinquency rate on closed-end second liens jumped 49 bps to 3.52% in the first quarter -- also a new high. "The number one driver of delinquencies is job losses," said ABA chief economist James Chessen. He noted that 2 million Americans lost their jobs in the first three months of this year. "Even if home prices stop falling this year, employment will keep home equity delinquencies high for some time," he added. The Federal Deposit Insurance Corp. recently reported that charge-offs on HELOCs totaled $4 billion in the first quarter, compared to $3.3 billion in the previous quarter. Charge-offs on closed-end second liens totaled $2.5 billion, a 25% increase from the fourth quarter. Meanwhile, a new report from PMI Mortgage Insurance says that 85% of the nation's metropolitan areas are "now facing an increased risk" of lower home prices into 2011. The only good news PMI could offer is that the rate of home price declines has slowed and that falling values are making homes more affordable in many metro areas.

After being convicted of 51 counts of conspiracy, fraud and money laundering in connection with a mortgage fraud scheme, Harold Stafford of Sumner County, Tenn., has been sentenced to eight years in prison, followed by three years of supervised release. His co-defendants, Miles Jackson Black and Jeffrey Dunn Hathcock, also from Sumner County, were each sentenced to a year and a day in prison, followed by five years of supervised release. All three defendants were ordered to jointly pay $1 million in restitution and a special assessment of $5,100. According to the U.S. attorney's office for the Middle District of Tennessee, Stafford engaged in a scheme that involved the purchase of 22 luxury homes in Hendersonville, Gallatin and Goodlettsville through unqualified straw buyers. Stafford, Black and Hathcock caused the submission of false mortgage loan applications to lenders that overstated the straw buyers' income, falsely stated that the homes would be the straw buyers' primary residences and failed to disclose other recent home purchases by the same straw buyers. All of these mortgage loans ended in default and foreclosure, resulting in losses to mortgage lenders, after foreclosure, totaling $2,214,700.

Standard & Poor's credit analysts expect higher levels of defaults this year as performance of prime jumbo loans continues to deteriorate. "Most losses in subprime and riskier alt-A mortgages have been taken, but we still expect more losses in the prime jumbo market due to economic reasons and seepage into the traditional prime conforming market," an S&P report said. The report showed that 6.7% of jumbo loans originated in 2006 and 2007 are 90 days or more past due, in foreclosure or real estate owned as of April 30. "While jumbo borrowers generally have better jobs and more wealth, "we think many are being overcome by the economic conditions (job losses) and asset-value depreciation that we believe is causing worst-than-historical performance in this asset class," the S&P analysts said.

The 12 Federal Home Loan Banks reported combined earnings of $345 million in the first quarter, down 50% from a year ago, as six banks took a net loss for the quarter primarily due to impairment charges on private-label mortgage-backed securities. "Other than temporary impairment" charges on the $61.2 billion in private-label MBS held by the FHLBanks reduced earnings by $516 million. The banks also recognized $4.7 billion in private-label MBS valuation losses in "accumulated other comprehensive income." Federal Housing Finance Agency director James Lockhart recently told Congress that the credit quality of the FHLBanks' investments in private-label securities has proven to be "much worse" than expected. "With ongoing uncertainty surrounding the true economic value of PLS, those investments will continue to raise safety and soundness concerns," the GSE regulator said. As of March 31, combined retained earnings totaled $5 billion while losses recognized in accumulated other comprehensive income totaled $7.4 billion. Half of the FHLBanks have suspended dividend payments to rebuild retained earnings. The 12 banks have $1.2 trillion in assets and $60 billion in regulatory capital, according to the combined first quarter report issued by the FHLBank Office of Finance.

The California State Teachers' Retirement System is searching for a master servicer for its home loan program. The selected firm will assist CalSTRS employees in daily operations, record keeping and in the development of execution strategies. The contract is for three years with the possibility of two one-year extensions. Servicers will have to show how they will assist CalSTRS with loan origination, underwriting and approval; loan delivery and servicing; data reporting; technology tools and support; marketing assistance and support; and customer service and client support. The CalSTRS Home Loan Program provides the pension fund's members with mortgage loans at a reasonable market rate. The program offers down payment assistance options and reverse mortgages. Funding through the program grew by $281 million and more than 1,500 in 2008. At the end of last year, the program had a total of $4.6 billion, representing more than 35,000 mortgages. The final filing date for proposals is July 30, 2009, with the selection expected in the fall of 2009. The request for proposal is available for viewing on the CalSTRS Web site at http://www.calstrs.com/rfp.

Fannie Mae and Freddie Mac have received the green light from their regulator to refinance underwater homeowners with loan-to value ratios as high as 125%. The special refinancing plan that Obama administration officials unveiled in February limited the refinancing option to loans with LTV ratios of 80% to 105%. But the 105% LTV limit would not offer any relief for borrowers who have seen the values of their home erode by 15% to 30%. "The higher LTV refinancings will allow more homeowners to strengthen their finances by taking advantage of lower mortgage rates," Federal Housing Finance Agency director James Lockhart said. Fannie Mae said it would accept delivery of the higher LTV loans starting Sept. 1. A Freddie Mac spokesman said it would start accepting the loans "now." The GSE financing program is only available to borrowers with loans that are owned or guaranteed by Fannie and Freddie. They also have to be current on their mortgage payments. "On the 105%-125% LTV loans, lenders can either sell us the loans for cash or deliver them into an MBS execution to be sold to other investors," a Fannie spokesman said.

Less than three in 10 mortgages that were modified by servicers in the first quarter of 2008 are still current, according to a new "mortgage metrics" report released by the Comptroller of the Currency. The report indicates that as loan modifications age the chance of a mortgage going delinquent again increases significantly. The OCC found that just 29.5% of loans modified in 1Q08 are still "current and performing" while 48.2% of those modified in the fourth quarter were current. As for mortgages modified in the first quarter of this year — with the stated goal being home retention by the mortgagor — almost 36% are already in some stage of delinquency, the OCC found. Even though the relapse rate is poor, mortgage servicers are under increasing pressure to help consumers. Loan modifications by mortgage companies increased by 172% in the first quarter compared to the same period last year. Servicers initiated 185,156 new loan modifications in 1Q — a 55% jump from the previous quarter. The report also shows that foreclosure actions in the first quarter totaled 290,900, up only 4% since the first quarter of 2008.

The number of completed loan modifications has fallen in April and May as servicers put more loans through a 90-day trial period as required by the Obama administration's Home Affordable Modification program. "Many of these trial modifications will result in formal reporting of modifications after 90 days," according to Hope Now, an alliance of mortgage servicers. Hope Now servicers reported that they modified 101,000 mortgages in May, down from 121,000 in April and 134,000 in March. Meanwhile, foreclosure sales jumped to 82,600 in May, up from 62,800 the previous month. Nearly two thirds of the foreclosure sales in May and April involved prime mortgages.