Servicing

Home prices have fallen 18% since 2006 and could drop another 10% in 2009, which means the average mortgage could be "underwater" soon, according to a former Fannie Mae executive who served as the GSE's chief credit officer in the 1980s. Speaking before the American Enterprise Institute, former GSE executive Edward Pinto said the average loan-to-value ratio on most single-family loans was roughly 95% at year-end 2008. Mr. Pinto, now a consultant, said that figure could rise to 109% at the end of this year, a first. He noted that a 20%-plus drop in home prices has not occurred since the Great Depression when values fell 24% between 1929 and 1933. LTVs, though, were much lower in the Depression. The consultant relies on home price indexes issued by the Federal Housing Finance Agency and S&P Case Shiller in making his price estimates. Mr. Pinto said the government is on the hook for nearly 70% of all mortgages due to its backing of Fannie Mae, Freddie Mac, the Federal Home Loan Banks, the Federal Housing Administration and Federal Deposit Insurance Corp. If Congress passes bankruptcy reform legislation that allows for mortgage cramdowns, the government will be "cramming down the loans they are responsible for," Mr. Pinto said.

Credit quality -- including mortgages -- continued to deteriorate at Bank of America, contributing to its fourth quarter net loss of $1.79 billion. The nation's largest bank released earnings Friday morning, a day after the Treasury Department agreed to invest another $20 billion of taxpayer money into it. The government also will backstop as much as $118 billion in potential losses on various assets, primarily those brought by Merrill Lynch. The 4Q loss includes Countrywide's operations, but not Merrill Lynch's. Preliminary figures show that Merrill Lynch -- a large issuer of subprime ABS and CDOs -- lost $15.31 billion for the fourth quarter. At year end BoA had $18.23 billion in non-performing assets, compared to $5.95 billion a year earlier. The company increased its loan loss provision to $8.54 billion. During 2008, BoA and Countrywide modified approximately 230,000 home loans. In the fourth quarter, BoA extended $115 billion in new credit: $45 billion in mortgages, $7 billion of commercial real estate, and roughly $5 billion in home equity products. For the full year, BoA earned $4.01 billion.

Steep losses on asset-backed securities and additional loan loss provisions contributed heavily to Citigroup's $8.29 billion fourth quarter loss. Lower mortgage servicing income, as well as rising delinquencies on both first and second mortgages, also weighed on Citi's results, contributing to a 22% decline in consumer banking revenue. Citi's consumer banking division, which includes its mortgage operations, suffered $1.6 billion in fourth quarter credit losses. And the company added $2 billion to its consumer banking loan loss reserves, reflecting an increased volume of loan modifications across product lines. Overall, the North America consumer banking segment lost $2.2 billion in the fourth quarter. Meanwhile, Citi's securities and banking group lost $10.6 billion, reflecting writedowns on derivatives and securities, including a $4.6 billion downward adjustment on subprime mortgage securities. Citi also wrote down Alt-A mortgages, net of hedges, by $1.3 billion. It wrote down commercial real estate positions by nearly $1 billion. Citi also announced it is splitting its business into two operating units, Citicorp and Citi Holdings. Citicorp will be the company's global universal bank in more than 100 countries. Citi Holdings, described as "non-core" businesses, will be made up of brokerage and retail asset management, local consumer finance, and a special asset pool whose management will focus on managing risks and losses. Citi said management will focus on "value enhancing disposition and combination opportunities" for the Citi Holdings businesses as opportunities emerge.

Mortgage rates will remain below 5% for the first half of this year which will help stabilize home sales and keep a refinancing wave going, according to a consensus forecast by banking economists. "A surge of refinancings is already under way and lower home prices and interest rates will gradually support an increase in home sales," said Bruce Kasman, chief economist at JPMorgan Chase. Mr. Kasman is chairman of the American Bankers Association Economic Advisory Committee, which expects the government's efforts to stabilize the financial system and stimulate the economy will lead to a recovery in the second half with gross domestic product rising to 3.8% in the fourth quarter of 2009. However, the bank economists see house prices continuing to fall and mortgage delinquencies rising throughout 2009. The refinancing wave will be "substantial," predicted Mr. Kasman, noting that a high rate of applications may be rejected and cash-out refis will be modest.

As the refinancing boom gathers steam selected residential funders are beginning to charge "rate lock" fees to both consumers and loan brokers, according to industry participants. One mortgage executive, requesting anonymity, said his current servicer, Chase of Iselin, N.J., wanted to charge him 50 basis points to lock in a low rate on his refinancing. He passed on the offer. A call to Chase's 800-number by National Mortgage News resulted in a ten minute wait, and the representative on the other end of the line would not quote any loan information without the caller filling out a credit report. At least three top ten lenders contacted by this newspaper -- Bank of America, Wachovia, and Wells Fargo -- said they do not currently charge lock-in fees for retail applicants. Marc Savitt, current president of the National Association of Mortgage Brokers, said he has heard stories about wholesalers charging brokers a fee to lock in but has not seen anything in print. (For the full story see the Monday, January 19 edition of NMN.)

Commercial real estate markets "deteriorated' in most areas of the country, according to the Federal Reserve's Beige Book, which also registered an increase in residential refinancings during December. "Contacts in the Boston District described the commercial real estate market as grim and depressing," the Beige Book says. The Dallas Federal Reserve Bank said that CRE transactions in its district have "ground to a halt." In the previous Beige Book, the Fed said CRE markets had "weakened broadly." Meanwhile, residential real estate markets remained weak. "Reduced home sales, lower prices or decreases in construction activity were noted in most districts," the Beige Book says. However, the New York, Cleveland, Richmond, Chicago, Kansas City and San Francisco district banks saw an increase in residential mortgage refinancings.

The 2008 U.S. Foreclosure Market Report, according to RealtyTrac, shows a total of 3,157,806 foreclosure filings were reported on 2,330,483 U.S. properties during the year, an 81% increase from 2007 and a 225% increase from 2006. Filings were reported on 303,410 properties in December, up 17% from November and up nearly 41% from December 2007. Despite the spike in December, foreclosure activity for the fourth quarter was down nearly 4% from the third quarter, but still up nearly 40% from the fourth quarter of 2007. "The big jump in December foreclosure activity was somewhat surprising given the moratoria enacted by both Freddie Mac and Fannie Mae, along with programs from some of the major lenders and loan servicers aimed at delaying foreclosure actions against distressed homeowners," said James J. Saccacio, chief executive officer of RealtyTrac. Nevada, Florida and Arizona posted the top state foreclosure rates. More than 7% of Nevada housing units received at least one foreclosure notice in 2008, giving it the nation's highest state foreclosure rate for the year. A total of 77,693 Nevada properties received a filing, an increase of 126% from 2007. California, Florida and Arizona posted the highest foreclosure totals. California saw a total of 523,624 properties receiving a filing in 2008, the nation's highest state total. Activity in the state increased nearly 110%rom 2007 and 498% from 2006. To find out more visit http://www.realtytrac.com.

The Mortgage Bankers Association is now supporting the creation of a national mortgage regulator, the group's chief executive John Courson said in a meeting with the SourceMedia Mortgage Group editorial staff. The industry has lost its credibility and its image has been tarnished across the board. To restore that credibility, the industry needs to take bold actions, he declared, and there now is the opportunity for "a do-over." This includes "aggressively" seeking federal regulation of nondepository mortgage lenders. Mr. Courson pointed to the patchwork of state regulatory schemes, noting that there are some states where it is virtually non-existent. There is still room for state regulators, in terms of examinations, audits and enforcement, he said. But there needs to be a federal regulator to set the bar and that bar needs to be set high enough to be credible. Another topic of discussion was the future of the secondary market. Mr. Courson said MBA held a summit that brought together parties across the spectrum of divergent views of what should be done regarding Fannie Mae and Freddie Mac. The result was a paper that Mr. Courson described as a starting point for what to do. It discusses several models but does not advocate any particular one.

Continued writedowns on mortgage trading positions and leveraged loans totaling $2.9 billion pretax contributed "largely" to "disappointing" fourth quarter 2008 results at JPMorgan Chase, but the company also noted that there also were some positive mortgage-related developments during the period. The company produced $702 million in net income during the quarter, a result chairman and chief executive Jamie Dimon said was "very disappointing" and "driven by a loss in investment banking largely attributable to continued markdowns on leveraged loans and mortgage trading positions, as well as weak trading results." But the company also noted that it received an $854 million after-tax benefit from mortgage servicing risk management and touted more than $100 billion in "safe and sound lending activities" in areas that included home equity and mortgage. It also said it made "significant enhancements to mortgage modification programs" during the fourth quarter.

JPMorgan Chase & Co. - which in years past has been one of the largest acquirers of residential servicing rights - said it will no longer be a buyer of "bulk" servicing packages from its correspondents. The edict goes into affect January 16, which is also the cutoff for its approval of loan packages submitted to it by mortgage brokers. Two days ago news broke that Chase (the name of JPM's mortgage division) was shutting down its entire wholesale division, the largest in the nation. A company spokeswoman said the bank would continue to buy mortgages from correspondents, which include non-bank lenders and depositories. At press time, the spokeswoman had not commented on its exit from servicing acquisitions, which include "forward" and "seasoned" bulk packages. Jeffrey Levine, managing director of Milestone Advisors, Miami, said JPM's decision to avoid bulk servicing purchases "may be a sign that they're being more selective on who they're dealing with" as a way to limit counterparty risk and allocate more capital to servicing generated by their bank and mortgage company retail customer base. Retail loans historically have performed better than third-party originations and offer higher cross-sale value, he said. As a correspondent buyer of mortgages, JPM usually buys the servicing rights along with the loans. As the mortgage crisis has worsened, few large banks have bought bulk servicing rights which represent the servicing "strip" of an underlying pool of mortgages. Fannie Mae/Freddie Mac loans carry an average servicing fee of 25 basis points, though it can vary depending on the arrangement with the seller/servicer. Investment bankers who perform advisory work have identified three firms as being the largest buyers of bulk servicing rights the past 12 months: Chase, Citigroup, and Wells Fargo.