Servicing

The Securities and Exchange Commission has nearly completed a study on mark-to-market accounting and preliminary findings point to the need for additional guidance in valuing mortgage-backed securities in inactive or illiquid markets, according to SEC chairman Christopher Cox. "The work we have already done suggests that the accounting standard setters could improve upon the existing security impairment models," the SEC chairman told an American Institution of Certified Public Accountants. Congress mandated the study because financial services executives are complaining that mark-to-market accounting is forcing wholesale writedowns of assets at fire-sale prices. "Investors have also clearly indicated a view that the current concept of mark-to-market accounting increases transparency of financial information provided to investors - but that in inactive or illiquid markets, additional guidance would be useful to promote reasonable application of the standards," Mr. Cox said. SEC is slated to submit its mark-to-market study to Congress by Jan. 2.

Mortgage bankers will foreclose on 8.1 million homes over the next four years, representing 16% of all outstanding residential loans in the U.S., according to a new report issued by Credit Suisse. Back in April CS forecast 6.5 million foreclosures, or 13% of outstanding mortgages. The Wall Street firm says it favors a plan by Treasury to create a 4.5% mortgage using mortgage-backed security issuance but believes the agency "should target an even lower rate in foreclosure hot zones where entire neighborhoods are at risk." CS analyst/managing director Rod Dubitsky estimates that within two years 72% of consumers with a subprime loan - and 83% of payment-option ARM borrowers - will be in a negative equity position if home prices fall 15%. Mr. Dubitsky spoke at the annual housing forum sponsored by the Office of Thrift Supervision on Monday afternoon.

House Financial Services Committee chairman Barney Frank, D-Mass., does not expect changes to the bankruptcy law to prevent foreclosures will be included in an economic recovery bill that congressional leaders want to pass in late January for President Barack Obama to sign. But the committee chairman warned industry groups that Congress could pass a bankruptcy bill later next year that allows judges to modify mortgages on primary residences if the level of loan modifications does not pick up significantly. "If by February we have the same frustration. If we aren't able to have a better success rate at reducing foreclosures, then I believe political support for bankruptcy will increase," Rep. Frank said at an Office of Thrift Supervision housing forum. Chairman Frank also noted that the new president would have "plenty of legal authority" to implement an aggressive loan modification program thanks to the Troubled Asset Relief Program Congress passed in October. And the economic recovery bill does not need to address that issue. "I don't think you need legislation," he told reporters.

The percentage of home loan borrowers who are least 60 days past due on their mortgage rose 54% between the third quarter of 2007 and the third quarter of this year, according to TransUnion.com. Nationally, 3.96% of homeowners were 60 or more days past due in the third quarter, marking the seventh consecutive quarter of rising overdue rates, according to TransUnion. That delinquency rate, considered a precursor to foreclosure, was up 12% from the second quarter. States with the highest delinquency rates were Florida, at 7.82%, and Nevada, at 7.71%, the company said. The lowest overdue rates were found in North Dakota, South Dakota and Montana, states where the 60-day overdue rate remained below 2%. Average mortgage debt per borrower stood at $192,287 nationally.

Re-defaults of newly modified loans are "remarkably high," according to the Office of the Comptroller of the Currency. The OCC released data showing that 36% of modified loans are 30 days past due after three months. "After six months, the rate was nearly 53% and after eight months, 58%," Comptroller John Dugan said at an Office of Thrift Supervision housing forum. Using first quarter data, the OCC also found that 35% of modified loans were 60-days past due after six months. "Not all re-defaulted mortgages go to foreclosure," Mr. Dugan said. But the OCC is beginning to ask servicers why the re-default is so high. The Comptroller also gave a preview of the third quarter OCC/OTS report on loan workouts and foreclosures that will be released soon. He noted that loan modifications have nearly doubled since the first quarter and foreclosure starts fell 2.6%. Foreclosure starts totaled 288,740 in the second quarter.

The Federal Housing Finance Agency this week will release "standards" for Fannie Mae and Freddie Mac servicers engaging in loan modifications, agency chief James Lockhart said Monday. Speaking at the Office of Thrift Supervision forum on housing, Mr. Lockhart said he wants servicers to begin thinking about how they can modify loans that are in private label securities. He provided no details. Meanwhile, Federal Deposit Insurance Corp. chairwoman Sheila Bair defended the concept of government involvement in loan modifications after a new study by the Comptroller of the Currency found that in some cases half of all modified loans wind up delinquent again just months after being restructured (see related item below). Ms. Bair said the OCC study offers no "granular" detail on borrowers going delinquent after having their loans modified. She said the OCC study offers no information on debt-to-income ratios, borrower income and other metrics.

The plummeting yield on the 10-year Treasury - which historically has served as a benchmark for mortgage rate direction - hit a new 45-year low on Friday. Early in the afternoon the benchmark yield was at 2.57%, more than 20 basis points lower than where it was earlier in the week. The last time the 10-year Treasury yield was lower came in 1962 when it was at 2.55%, according to Thomas L. di Galoma, managing director and head of U.S. Treasuries at Jefferies & Co. An employment report released Friday morning has been a "focus" for Treasuries as has "the plan to lower mortgage rates by the Fed/Treasury," Mr. di Galoma and fixed-income researchers at Jefferies said in their Friday morning Treasury market report. International rate cuts also have played a role, the researchers said.

Mortgage companies dropped 8,400 full-time employees from their payrolls in October after mortgage originations fell to an eight-year low in the third quarter. The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector fell to 343,400 positions from 351,800 in September, a 9% decline from a year ago. The mortgage industry took its biggest job hit in 2007 when 110,000 workers lost their jobs or left the industry. Friday's job report shows "we are the deepest part" of the recession, said Brian Bethune, chief U.S. financial economist at IHS Global Insight. The overall U.S. unemployment rate rose to 6.7% as 533,000 workers lost their jobs in November. Although the government's response to the financial crisis came six to 12 months too late, said the economist, he expects mortgage rates to fall below 5%, and spur a surge in refinancing activity. "It is going to get hot," Mr. Bethune said. But he warned there will be a "huge bottle neck" because the banks don't have people in place in process the applications.

Apollo Management, an investment fund controlled by Leon Black, is one of three finalists for the government controlled IndyMac Bank, mortgage and investment banking officials told MortgageWire. Apollo is backing Vantium Capital, managed by Amy Brandt, the former head of subprime lender WMC Mortgage of California. Vantium is investing in both troubled mortgages and functioning as a "scratch and dent servicer." A spokesman for Apollo declined to comment. A FDIC spokeswoman would not discuss the status of the sale except to say, "We'll announce the winning bidder by year end." Early on in the bidding process two other investment funds - Cerberus Capital and J.C. Flowers & Co. - expressed an interest in the thrift, which services roughly $180 billion in mortgages. IndyMac, created by Countrywide Home Loans two decades ago, is based in Pasadena, Calif.

There's little hope to stem the tide of rising mortgage delinquencies and defaults in the short term, according to economists who follow the industry. Jay Brinkmann, chief economist for the MBA, said that declining home values, which limit the ability of troubled borrowers to sell a home, have increased the "roll rate" of 30-days delinquent loans in one quarter that go into foreclosure during the next quarter. In the 1990s, about 10% of 30-day past due loans moved into foreclosure. Today, about 30% of short-term delinquencies roll into foreclosure, he said during a conference call to discuss the MBA's delinquency survey. Moreover, in hard hit states, the roll rate is even higher, 75% today in California, for instance. And with unemployment rising fast, there's little hope for relief in the short term, according to Ryan Sweet, an economist at Moody's Economy.com. He told MortgageWire that he expects the unemployment rate to rise to 8.5% by early 2010. "Mortgage credit quality is going to decline well into 2009," Mr. Sweet said.