Servicing

The rapid growth in FHA originations during 2008 has many concerned the federal mortgage insurance program is headed for trouble, but so far agency officials say they have not seen deterioration in loan performance, even when it comes to borrowers missing their first or second payments. "We have not seen any increase in early payment defaults," said Meg Burns, director of Federal Housing Administration single-family program development. FHA data and analysis show that only 0.6% of the over one million FHA loans originated in the first nine months of 2008 experienced first or second payment defaults, down from 0.8% in the same period in 2007. In addition, the default rate on FHA loans where borrowers miss three of the first six payment months has declined slightly. Early defaults generally are caused by income, martial or illness problems and they don't necessarily lead to foreclosures or claims on the FHA insurance fund. "There really is no correlation there," Ms. Burns said.

Fitch Ratings has cut the insurer financial strength ratings at MGIC Investment Corp. and The PMI Group to 'BBB' and 'BB,' respectively. For Milwaukee-based MGIC, the cut "reflects the loss expectations and capital constraints facing MGIC as an independent mortgage insurance company," Fitch said. "In addition to limited capital markets access, MGIC has few remaining assets that could be monetized to increase its capital resources (as the company did in 2008 with the sale of its interest in Sherman Financial LLC) and will largely have to rely on current capital resources to satisfy ongoing MI claims." Fitch said PMI requested that the rating agency withdraw its ratings and will no longer provide it with non-public data. "PMI has extremely limited access to the capital markets and, as a result, will largely have to rely on current capital resources to satisfy ongoing MI claims," Fitch said. Both MIs have posted large losses in the past year and their shares trade for $1 or less.

The price gap between homes that sell as REO and the rest of the market is widening, according to a new study by Lender Processing Services. Prior to 2007 the difference in prices was slim, said LPS, a mortgage software company based in Jacksonville, Fla. Using a home price index that it developed, LPS conducted a study of changes in regional home prices between 2007 and 2008 in the nation's top housing markets. "In general, markets that experienced sharp drops in home prices in 2008 also saw deeper REO discounts," said LPS senior vice president Nima Nattagh. The largest drop in prices of REO sales were found in Riverside County, Calif. In 2008 home prices fell 28% there compared to 2007. However, when REO sales are factored in, prices fell by 34%. Home prices declined by 29% during 2008 in Phoenix where analysts cite significant overbuilding. When REO sales were excluded from the analysis, though, the price decline was less severe at 19% year over year. The gap between home prices with and without REO sales was smallest in Seattle, New York and Cambridge, Mass. While the Western states and Michigan and Florida saw double-digit declines in home prices, other regions have fared much better. But further deterioration in the housing market will most likely deepen the REO discount levels in these markets, LPS said.

The Government National Mortgage Association is poised to play a role in easing the warehouse lending liquidity crisis but does not think it will be a direct lender.In an interview with the American Banker GNMA president Joe Murin said the agency cannot become involved in warehouse lending without a change to its government charter but noted that "we certainly could help administer a program." He said one option is for GNMA to take possession of loans three days after they close and fund, instead of the 15 to 45 days it typically takes to put the mortgages in securitization pools. Depositories that hold warehouse loans on their books face a 100% risk weighting on such debts until the mortgages can be taken off the lines. Recently two of the largest players in warehouse lending—the PNC-owned National City and Guaranty Federal Bank—made plans to exit the business.

The Federal Reserve Board has expanded its new TALF lending facility to help cash strapped mortgage servicers that pay advances to MBS investors to cover missed payments by delinquent homeowners. Starting in April, the Fed's Term Asset-Backed Securities Loan Facility will start accepting servicing advances as collateral in asset-backed securities. Details for the first TALF funding for mortgage servicing advances will be released March 24. "Accepting ABS backed by mortgage servicing advances should improve the servicers' ability to work with homeowners to prevent avoidable foreclosures," the Fed said. Scott Talbott, senior vice president for the Financial Services Roundtable, welcomed the Fed's initiative. "This will help restore liquidity in all areas of the mortgage market," Mr. Talbott said.

While the gap between REO sales prices and the rest of the market was very slim prior to 2007, a new study from Lender Processing Services, Inc. in Jacksonville, Fla., shows that gap is growing at an accelerating pace. Using LPS' newly developed, proprietary home price index that can include or exclude real estate owned sales, the company conducted a study of changes in regional home prices between 2007 and 2008 in the nation's top housing markets. "In general, markets that experienced sharp drops in home prices in 2008 also saw deeper REO discounts," said Nima Nattagh, senior vice president, LPS Applied Analytics. The largest drop in prices of REO sales were observed in Riverside County, Calif. Home prices fell by 28% here in 2008 versus 2007; however, including REO sales, prices fell by 34% when compared to 2007. Home prices declined by 29% during 2008 in Phoenix where analysts cite significant overbuilding. When REO sales were excluded from the analysis, though, the price decline was less severe at 19% year over year. The gap between home prices with and without REO sales was smallest in Seattle, New York and Cambridge, Mass. While the Western states and Michigan and Florida saw double-digit declines in home prices, other regions have fared much better. But further deterioration in the housing market will most likely deepen the REO discount levels in these markets, the study said.

Negotiations over bankruptcy cram down provisions in a housing bill have hit a snag and Senate Democratic leaders have put off legislative action until late April. "(I)t looks likely that we will not be able to take up this housing bill until the next work period," said Regan Lachapelle, a spokeswoman for Senate majority leader Harry Reid. "We will continue to work with Senator Durbin and Senator Dodd to ensure we have the votes when we move this bill forward." Democratic Sens. Richard Durbin (Ill.) and Christopher Dodd (Conn.) are leading the effort to pass the housing bill (H.R. 1106) with the bankruptcy cram down provisions. Lenders are seeking strong language in the bill to prevent homeowners they can help with a Treasury Department-compliant loan modification from opting into Chapter 13 bankruptcy where a judge can reduce the principal amount of the mortgage. Such bankruptcy protection seems acceptable to consumer groups. But the Center for Responsible Lending wants provisions to ensure low-income borrowers are protected if they cannot afford the monthly payments under a Treasury loan modification. Lenders are concerned this could be a big loophole. Other issues also need to be resolved. CRL president Michael Calhoun told a Women in Housing and Finance symposium that he is optimistic the Senate will pass a bankruptcy bill. "I think a bankruptcy package will come out of the Senate within the next four to six weeks," Mr. Calhoun said. The Senate returns from a two-week spring recess on April 20.

After its stock price dipped to under a dollar earlier this month, Citigroup, the nation's fourth largest residential lender, has seen its stock price more than triple, trading at $3.20 Thursday morning. The company said it plans to both increase the number of shares outstanding and undertake reverse stock split as part of the company's effort to exchange common stock for preferred securities, pending shareholder approval. Late last month, Citi announced that it is seeking to exchange about $27.5 billion in public and private preferred securities as part of its agreement with the Treasury Department, which has pledged to match up to $25 billion of the conversions.

After pleading guilty to conspiracy charges in connection with a multi-million dollar mortgage fraud scheme to commit bank fraud before U.S. District Judge George Caram Steeh, Ali Haidous, a real estate appraiser from Dearborn, Michigan, was sentenced to one year of imprisonment. Haidous admitted to inflating appraisals in a scheme involving 16 total properties located in Detroit, Dearborn, and Dearborn Heights, Michigan. Mortgages totaling $1.9 million were issued on the 16 properties by several financial institutions between April 2005 and April 2008. Haidous admitted to being paid $1,000, rather than his usual fee of $300-$500, for each fraudulent appraisal. Haidous prepared the fraudulent appraisals for co-defendant Hassan Nagi, a mortgage broker from Dearborn Heights, who used the fraudulent appraisals to submit false applications to obtain the mortgages for "straw buyers. Nagi pleaded guilty on Dec. 15, 2008 and is scheduled to be sentenced in April.

The Treasury Department has explained how to use a new website that allows homeowners to learn about Obama administration's new housing plan and whether they can qualify for a loan modification.The new MakingHomeAffordable.gov website has a calculator that allows homeowners to estimate how they could benefit from a modification. "Be sure to check out the calculator that allows homeowners to estimate the reduction to their monthly mortgage that they might get under the plan," a White House blog says. Meanwhile, agency officials are working on a net present value (NPV) test that servicers will use to determine if a loan should be modified. They plan to roll out a standard NPV model soon that provides some flexibility for servicers. For example, a servicer with a low re-default rate would not have to use the national rate.