Servicing

While legislation that allows bankruptcy judges to "cram down" residential mortgages will have a varied impact on mortgage-backed securities, analysts at Fitch Ratings say the legislation is "not likely to trigger immediate rating downgrades." But if cramdown legislation is enacted and entices more consumers to try to alter the terms of their home loans through the bankruptcy process, then downgrades may ensue, according to Huxley Somerville, head of Fitch's U.S. residential MBS group. "Due to varying deal language, about 31% of Fitch rated prime and alt-A transactions have a greater risk of senior bond downgrades with the remaining 69% having limited risk," Mr. Somerville said. Fitch said it remains to be seen what impact bankruptcy cramdowns may have on the extent and pace of loan modifications and the degree to which the legislation may increase consumer bankruptcy filings.

The House Judiciary Committee Tuesday evening approved legislation giving bankruptcy judges broad authority to reduce or "cram down" the principal amount of a mortgage on a primary residence by a 21 to 15 vote, but politicians and industry lobbyists differ on the scope of an exemption for FHA and VA mortgages. Mortgage industry lobbyists tried to narrow the scope of the bill. But an amendment by Rep. Trent Franks, R-Ariz., to limit bankruptcy cramdowns to mortgages originated from 2004 through 2008 was defeated. Committee chairman John Conyers, D-Mich., said his bill exempts Federal Housing Administration, Department of Veterans Affairs and Rural Housing Service guaranteed loans from cramdowns. But industry lobbyists claim the exemption for government-insured loans does not go far enough and amounts to little more than guidance to the bankruptcy courts. "If this bill is enacted, lenders will no longer participate in these programs because it provides no assurance against a possible cramdown," one bankruptcy expert said. Committee action on the bankruptcy bill (H.R. 200) came too late to attach it to the economic stimulus bill. Chairman Conyers will probably attach H.R. 200 to the next major piece of legislation moving through Congress. Rep. Conyers said during the markup session that he is still open to making improvements to the bill. The Conyers bill basically follows the outline of a compromise Citigroup endorsed, which allows cramdowns on existing mortgages originated up to the date of enactment. Rep. Conyers added one provision that allows lenders to share in future appreciation of the property.

Wells Fargo posted solid mortgage origination numbers and said home loan volume continues to trend upward, despite its quarterly loss of $2.6 billion amid a $5.6 billion increase to its credit reserve. Wells took in $116 billion of mortgage applications in the fourth quarter of 2008, up 158% from the year earlier period. And application volume in December marked the fourth highest monthly application volume in the company's history. Moreover, chief financial officer Howard Atkins said daily mortgage application volume during the first two weeks of January was running 20% higher than in December. The company had $71 billion of home loan applications in its pipeline at year-end. Wells estimates that it now accounts for 12% of the mortgage origination market, up from 10% a year earlier. Wells originated $50 billion of home loans during the fourth quarter and $230 billion for the full year. Wells' fourth quarter results did not include results from Wachovia, which Wells officially acquired on Dec. 31. Wachovia lost $11.2 billion in the fourth quarter. Wells' mortgage servicing portfolio swelled to $2.1 trillion at year-end with the addition of Wachovia's $379 billion servicing portfolio.

The House Judiciary Committee Tuesday evening approved legislation giving bankruptcy judges broad authority to reduce or "cram down" the principal amount of a mortgage on a primary residence - with the exception of government insured loans. The measure passed by a vote of 21 to 15. Mortgage industry lobbyists tried to narrow the scope of the bill, but committee chairman John Conyers, D-Mich., only agreed to exempt Federal Housing Administration, Department of Veterans Affairs and Rural Housing Service guaranteed loans from cramdowns. An amendment by Rep. Trent Franks, R-Ariz., to limit bankruptcy cramdowns to mortgages originated from 2004 through 2008 was defeated by a 20-15 vote. Committee action on the bankruptcy bill (H.R. 200) came too late to attach it to the economic stimulus bill. Chairman Conyers will probably attach H.R. 200 to the next major piece of legislation moving through Congress. Rep. Conyers said during the markup session that he is still open to making improvements to the bill. The Conyers bill basically follows the outline of a compromise Citigroup endorsed, which allows cramdowns on existing mortgages originated up to the date of enactment. Rep. Conyers added one provision that allows lenders to share in future appreciation of the property.

The Federal Housing Finance Agency, which has just instituted a final rule on the dollar size of Fannie Mae and Freddie Mac's on-balance sheet holdings, also is seeking comment from the industry regarding what criteria should govern their holdings in the future once they return to health. By law, Fannie and Freddie's portfolios cannot grow any larger than $850 billion, a cap that pertains to the last day of this year. After that, each must shrink its portfolio with the eventual goal of holding just $250 billion in mortgage-related assets. FHFA has published a list of 20 issues including "benefits and risks associated with mortgage portfolios" that it wants comments on. Respondents have 120 days to send in their answers. Fannie and Freddie were taken over by the government in early September and continue to bleed red ink.

House prices fell by another 2.2% in November for the second consecutive month and prices are off by 18.2% over the previous 12 months, according to the Standard & Poor's/Case-Shiller housing price index that tracks home sales in 20 major metropolitan areas. Since the peak in August 2006, prices have fallen 25% and the "freefall" continued in November, according to David Blitzer, chairman of S&P's index committee. Average house prices are now back to first-quarter 2004 levels. "The main force driving down house prices is foreclosures, which are still rising," IHS Global Insight economist Patrick Newport said. He expects house prices will continue to decline over the first half of this year.

The share of delinquent loans that roll into foreclosure status has skyrocketed recently, but MBA chief economist Jay Brinkmann says he is uncertain if the trend will continue. The most recent quarterly data from the MBA showed a slight decline in the roll rate, though it remains elevated by historical standards. Today, about 35% of loans that are 30 days past due during one quarter are subject to foreclosure proceedings in the following quarter. During the 1990s, the roll rate fell in a range of between 10% and 15%. In a conference call with reporters, Mr. Brinkmann said that high roll rates in California and Florida, as well as in Nevada and Arizona, are driving the dramatic national increase. In recent quarters, roll rates in California and Florida have exceeded 60%. In most areas of the country, including the economically struggling industrial Midwest, the increase in roll rates has been less dramatic. "I don't know if the rest of the country is going to follow more of a Michigan example or how much closer we are going to be to the California model," Mr. Brinkmann said.

The Mortgage Bankers Association is trying to get the Obama administration interested in a bifurcated refinancing program that the Treasury Department could implement using funds for the Troubled Asset Relief Program. The MBA program would allow borrowers who are underwater and cannot get help any other way a chance to obtain a new affordable mortgage with a 90% loan-to-value ratio. The government could probably sell the first mortgage but it would end up holding a second mortgage with little or no equity. The second lien would have priority over all other second liens under the MBA concept, and it would be payable on the gain from any future sale or refinancing. "It is geared toward borrowers who have the income and capacity to make a reduced payment," said MBA senior vice president Steve O'Connor. But it is also designed for borrowers who cannot qualify for a loan modification or regulator refinancing because of negative equity or the servicing and pooling agreement, he said.

Fannie Mae estimates it will ask the U.S. Treasury for $11 billion to $16 billion in funds to cover fourth-quarter losses and maintain a positive net worth. The losses stem from what it calls "credit expenses" and fair market writedowns on the value of its massive MBS holdings. Fannie said the "actual amount of the draw may differ materially this estimate" because it is still finalizing its financial statements. It would be Fannie's first draw-down under a senior-preferred stock purchase agreement Treasury set up for Fannie and Freddie Mac when they were placed into conservatorships in early September. Both GSEs can tap Treasury for $100 billion each. Freddie has already received $13.8 billion and is requesting $35 billion more. All totaled, the government will have invested $64.8 billion in taxpayer money in the GSEs when the funding requests are finally approved.

Cramdown legislation pending in Congress could cause a "substantial" surge in bankruptcy filings by consumers, including mortgagors who are currently paying their loans, according to a new report by Friedman Billings Ramsey. FBR notes that banks, thrifts and other large holders of second liens "would most likely be wiped out by a bankruptcy judge in the modification process." Banks with large HELOC portfolios that might be hurt include Bank of America, Citigroup and U.S. Bancorp, among others, FBR predicts. The Mortgage Bankers Association is lobbying to have cramdowns limited to subprime loans originated during the peak of the housing boom and that cramdown relief should be temporary. The House Judiciary Committee is expected to vote on cramdown legislation on Tuesday afternoon. According to a report in American Banker, concessions have been made to the mortgage industry that might soften the blow of cramdowns, including a provision that would allow lenders to share in the appreciation of a home's value with borrowers who discharge mortgage debt in a bankruptcy. Legislators are including language in the bill that would exempt Federal Housing Administration and Department of Veterans Affairs guaranteed loans from being crammed down. The MBA is adamant that a sunset date be attached to any cramdown authority.