Servicing

Franklin Credit Holdings, which made a name for itself as an investor in troubled mortgages, has restructured and is operating mostly as a subservicer. But the firm's servicing rights are now housed on the balance sheet of Huntington Bancshares, Columbus, Ohio, which still has financial ties to Franklin. In the first quarter, the bank restructured its relationship with Franklin, buying certain assets from the nonbank. (Huntington is a large receipient of government money through the Troubled Asset Relief Program.) "We used to put troubled loans on our balance sheet but now we're just a provider of services," said Franklin CEO Gordon Jardin. Mr. Jardin noted that Franklin has a "financial commitment" to Huntington, which used to bank Franklin. Currently, the Jersey City-based Franklin has $2 billion of subservicing contracts, most of which are tied to Huntington. "We're the subservicer for them," said Mr. Jardin. "We're going to try and grow our subservicing business," he added, saying the firm will focus on "scratch and dent" loans, subprime, and alt-A. FCH's shares are still publicly traded but in the OTC "pink sheets" market.

The Federal Reserve on Wednesday cleared the way for "legacy" commercial mortgage-backed securities to be included as collateral under the government's Term Asset-Backed Securities Loan Facility (TALF) program, come July 1. The Fed issued a statement noting that the move to include CMBS as "eligible TALF collateral ... is intended to promote price discovery and liquidity for legacy CMBS." According to the central bank, the CMBS market finances 20% of outstanding commercial mortgages. It said the market came to a standstill in mid-2008. The TALF program allows investors to use government money to buy certain asset-backed bonds. (To date, the effort has focused mostly on credit cards.) In regard to CMBS, the Fed said that only "senior" (in payment priority) CMBS are eligible for TALF. The Federal Reserve Bank of New York said it "will review and reject as collateral any CMBS that does not meet the published terms or otherwise poses unacceptable risk."

Redwood Real Estate Partners Inc., Rancho Santa Margarita, Calif., is launching a new investment fund focused on distressed residential real estate. The company plans to acquire $500 million in distressed residential RE in conjunction with the launch of the Occasio Distressed Residential Fund. The fund will be lead by John Duden, one of the founding partners of Fasthold Capital, a company that has specialized in the acquisition, restructuring, and liquidation of residential whole loans and real-estate owned portfolios.

Extremely high redefaults are forcing Fannie Mae to scale back its HomeSaver Advance program, which uses small personal loans to enable delinquent homeowners to catch up on their mortgage payments. A Federal Housing Finance Agency report shows 70% of borrowers redefaulted on their first mortgages in the first 3,300 advance transactions Fannie servicers completed in early 2008. "Fannie Mae is deemphasizing HomeSaver Advance and focusing attention on the Making Home Affordable modification program," an FHFA spokesperson said. Fannie Mae launched the advance program in February 2008 as a loss mitigation tool aimed at allowing the government-sponsored enterprise to avoid the cost of purchasing nonperforming mortgages out of securitized pools. The advances of up to $15,000 are supposed to help homeowners that have landed a new job or resolved other problems that got them into financial trouble so they can resume regular payments again. However, the FHFA report to Congress said the redefault rate "calls into question the program's assumption that borrowers have the capacity to make payments going forward." Fannie made 71,000 HomeSaver Advances in 2008 and another 20,400 advances in the first quarter with an average balance of $7,100. Fannie's first quarter financial report shows the mortgage giant had $516 million in HomeSaver Advances on its books as of March 31 after taking a $115 million charge-off. The quarterly report also notes the program's high redefault rate and says that the company is placing more emphasis on loan modifications.

The Senate has approved a housing bill that revamps the FHA Hope for Homeowners program and strengthens federal deposit insurance, clearing the measure for the President's signature. The House passed the bill (S. 896) Tuesday afternoon and the Senate followed very quickly to approve the measure, which does not include a controversial bankruptcy cramdown provision. Senate leaders stressed during discussions to reconcile the House and Senate versions of the bill that they can't get a cramdown provision through the Senate. The new Department of Housing and Urban Development secretary has been waiting for Congress to act so the Federal Housing Administration can make the H4H program a viable option for underwater homeowners to refinance into a FHA loans. However, HUD secretary Shaun Donovan has warned that the H4H program is dependent on the willingness of investors to write down the principal amount of the mortgages. "I do believe, frankly — given the drop in values, given what we have seen terms in foreclosures — we are starting to see some willingness of the investors" to take writedowns, he said recently. The housing bill also gives HUD new powers to police the FHA mortgage insurance program and penalize and debar lenders. It shields mortgage servicers from investor lawsuits and provides the Federal Deposit Insurance Corp. with more borrowing authority to deal with the rising bank failures. "S 896 will increase the FDIC's borrowing authority to $100 billion, enabling the agency to reduce the proposed special premium assessment on all banks," said Floyd Stoner, the American Bankers Association's chief lobbyist.

The House passed by a 367-54 vote a bill that revamps the FHA 'Hope for Homeowners' program and gives the HUD secretary discretion in setting insurance premiums on refinancings of underwater borrowers. The Senate is expected to pass the measure later this week. The bill (S.896) allows the Department of Housing and Urban Development to charge an upfront mortgage insurance premium of up to 3% and an annual premium of up to 1.5%. Previously, Federal Housing Administration had to charge a set premium of 3% and 1.5% respectively. It "requires the HUD secretary to weigh both the financial integrity of the program and the bill's purposes of foreclosure prevention in setting premiums," according to a summary of the legislation Servicers are expected to reduce the principal amount of the existing mortgage to qualify borrowers for the H4H program that Congress enacted last summer. However, the program is so restrictive that FHA had endorsed only one H4H refinancing as of April 30 with 916 applications pending. The Mortgage Bankers Association and other industry groups support Congress' efforts to relax the eligibility requirements and other requirements to make the program user friendly for homeowners, servicers and investors. S.896 also shields mortgage servicers from investor lawsuits and provides the Federal Deposit Insurance Corp. with more borrowing authority to deal with the rising bank failures. House and Senate leaders agreed to keep a temporary increase in the $100,000 deposit insurance limit at $250,000 through 2013.

Mortgage portfolio management services provider Digital Risk, Maitland, Fla., has named former JPMorgan Chase & Co. senior vice president Mark G. Hinshaw its chief financial officer. Separately, Digital disclosed that a private equity fund has taken a stake in the company. The company did not specify the extent of the equity stake that Century Focused Fund II took, but said that it was "significant." The fund is sponsored and managed by the Boston-based Century Capital Management, an institutional and private equity investment manager. At Chase, Mr. Hinshaw oversaw a $20 billion origination unit.

Triad Guaranty, whose MI unit is in a "run-off" mode, lost $55.2 million in the first quarter, compared to a $150 million loss in the same period last year. Company president and CEO Ken Jones said, "risk in default continued to increase as the combination of the recession and declines in home prices impacted our insured portfolio. While there were indications during the quarter that risk in default growth could be slowing on a monthly basis, we expect the challenging environment will continue for the foreseeable future." The publicly traded Triad has insurance-in-force of $60.5 billion, an 11% decline from March 31, 2008. Its shares trade for 89 cents compared to a 52-week high of $4.42 and a low of 12 cents. It is the nation's smallest MI.

Two main business units that used to make up Friedman Billings Ramsey Group Inc., Arlington, Va., are going for the full divorce. Arlington Asset Investment Corp. (the name FBR is using and expects to adopt legally after its annual meeting in June) will sell 16.7 million shares of common stock it holds in FBR Capital Markets Corp. back to that company for $72.5 million. FBR Capital became a separately traded public entity in 2007. The deal reduces Arlington's holdings in FBR Capital from 56% to 39% when it closes on June 2. Furthermore, the two sides will cooperate to facilitate the sale of Arlington's remaining holdings in FBR Capital. They also are terminating intra-company service and governance agreements. Rock Tonkel Jr., president and chief operating officer of Arlington, said the deal gives his company substantial additional liquidity and the ability to utilize its net operating loss carry-forwards and capital loss carry-forwards on a timely basis. The FBR Group was a major player in the subprime REIT IPO business, taking several firms public during the industry's boom.

Private label MBS — in particular subprime and alt-A loans — continue to be a "significant issue" for all the housing GSEs and have caused $26 billion of losses and impairments at these firms, according to a new report issued by the Federal Housing Finance Agency. In its first ever annual report to Congress, FHFA blames the previous managements of Fannie Mae and Freddie Mac for not requiring originators "to fully assess borrower capacity." It adds that, "Certain decisions, including the underestimation of risk associated with these products, coupled with changes in the economy, led to escalating increases in delinquencies, foreclosures, credit-related expenses and losses." FHFA's assessment also includes the Federal Home Loan Bank system. The government placed Fannie and Freddie into separate conservatorships in September and replaced their CEOs. The regulator says all housing GSEs face significant challenges including buying and guaranteeing mortgages with LTVs north of 80% due to declining home values and "constraints on the availability of private mortgage insurance."