Servicing

Two investment funds have filed a class action lawsuit to stop Countrywide Financial Corp. from passing off losses on loan modifications to investors in mortgage-backed securities. The complaint alleges that Bank of America's settlement with state attorneys general could lead to the modification of nearly 400,000 Countrywide loans totaling $80 billion and to a reduction in payments to investors by $8.4 billion and a reduction in value of the MBS. Under the pooling and servicing agreements, Countrywide must purchase the loans out of the securitized pools at par with accrued interest before the loans can be modified, according to the plaintiffs, Greenwich (Conn.) Financial Services and QED LLC. "The only way to modify the loan according to the contract is to purchase it," said William Frey, who manages both funds. There is no contractual ability for CFC to modify the loans and keep them in the securitized trusts, he added. Bank of America said loan modifications benefit both homeowners and investors. "We are confident any attempt to stop this program will be legally unsupportable," a statement issued by the bank said. The plaintiffs filed the class action lawsuit in a New York state court on behalf of investors in 373 CFC MBS totaling $150 billion.

Home prices fell at a 7.3% annualized rate during the third quarter, according to Freddie Mac's conventional mortgage home price index. That was the largest quarterly decline in the index's 39-year history. Frank Nothaft, Freddie Mac's chief economist, said disruptions in the credit markets during the third quarter likely weakened demand for housing and contributed to the continuing price declines. "With the unemployment rate having risen to 6.5% in October, there will likely be further weakening in housing demand, which could push the market bottom in home sales and housing starts out at least until middle to late next year and result in further declines in house prices," Mr. Nothaft said.

With the pace of bank failures quickening, the Federal Deposit Insurance Corp. is going outside the banking community to line up investors to bid on the assets and deposits of failed banks and thrifts. "FDIC recognizes that investors not organized as an FDIC-insured depository institution or holding company may potentially be interested in bidding on a failing institution," according to the agency. The FDIC has designed an expedited application process to get conditional approval for deposit insurance and to get on the FDIC's bidders list. However, investors still have to get preliminary regulatory approval for a bank charter. Applicants should have a business plan that is compliant with the Community Reinvestment Act, readily available capital and an identified management team, the FDIC said. There are 171 institutions on the FDIC's problem bank list with $115.6 billion in assets.

Fannie Mae's use of HomeSaver advances to cure delinquent loans in securitized pools peaked in June and July and two-thirds of the personal loans went to nonprime borrowers, according to a report by the Federal Housing Finance Agency. Fannie launched the HomeSaver program in February and it had made more than 45,000 advances totaling $301 million as of Sept. 30, according to the company's latest financial report. The average size of these unsecured loans is $6,700 and it has helped the mortgage giant fix the loans without purchasing them out of pools and recognizing a loss. From February through August, Fannie made 36,415 HomeSaver advances and 23,177 went to alt-A and subprime borrowers. Fannie made 11,725 advances in June and 10,599 advances in July. Advance activity dropped to 7,914 in August, according to the government-sponsored enterprise regulator.

The average weekly rate for a 30-year fixed-rate mortgage fell to 5.97% during the week ending Nov. 26 from 6.04% the week previous in a move Freddie Mac attributed to recent statistics signaling economic decline. "Signs the overall economy is flagging lowered most interest rates marketwide," said Frank Nothaft, Freddie Mac vice president and chief economist, noting that "economic growth in the third quarter was revised downward this week, led by the first decline in consumer spending since the fourth quarter of 1991 and the largest drop since the second quarter of 1980." In addition to falling week over week, the average rate for a 30-year FRM was down from the same period last year, when it was 6.10%. The average rate on the five-year Treasury-indexed hybrid adjustable-rate mortgage, at 5.86%, inched down to 5.86% from 5.87% but was the same as it was the year previous; while the average rate on the one-year Treasury-indexed ARM, at 5.18%, fell from 5.29% the previous week and 5.43% the year before. However, the average rate for a 15-year FRM, at 5.74%, was slightly up from the previous week and the previous year when it was 5.73%, in both cases. Points averaged 0.7 for 30- and 15-year FRMs, 0.6 for five-year hybrids and 0.5 for one-year ARMs.

Fannie Mae issuance of mortgage-backed securities fell to $28.6 billion in October, the lowest level since February 2001, and Ginnie Mae edged out the mortgage giant by issuing $29.2 billion in single-family MBS in the same month. Fannie's monthly activity report shows it purchased $13 billion of its own guaranteed MBS and its mortgage portfolio grew by $15.7 billion to $777.1 billion as of Oct. 31. The government-sponsored enterprise has been hampered by high funding costs in providing more support for the mortgage market. But the Federal Reserve Board's new initiative to purchase GSE debt and MBS should give Fannie a boost in the months ahead and hopefully lower mortgage rates. Meanwhile, the delinquency rate (90 days or more past due) on Fannie guaranteed mortgages rose to 1.72%, up from 1.52% in September and 0.78% in October 2007.

The Department of Housing and Urban Development should reopen the FHA 203(k) loan program to investors temporarily so they can purchase and renovate rundown foreclosed properties, according to the National Association of Realtors. "Investors utilizing the 203(k) program could purchase dilapidated foreclosed properties for rehabilitation and conversion to rental properties," NAR says in a letter to HUD secretary Steve Preston. Federal Housing Administration 203(k) loans cover the cost of buying a property and the estimated renovation costs in a single transaction. HUD closed the 203(k) program to investors in the late 1990s because of fraud and mounting loan losses. The NAR suggests allowing investors to participate in the FHA program for three years.

Federal Deposit Insurance Corp. researchers have calculated that 638,000 mortgages entered foreclosure in the second quarter while servicers had to deal with a larger crop of newly delinquent loans. Single-family mortgages becoming 60 to 90 days past due in the second quarter totaled 736,000, up from 670,000 in the first quarter and 618,000 in the fourth quarter of 2007. "What this tells us is that the number of problem mortgages is still rising and that finding alternatives to foreclosure remains a policy priority," said FDIC chief economist Richard Brown. There were 1.2 million foreclosures in the first half and it could hit 2 million by year-end, Mr. Brown said. "More needs to be done to modify loans," he added. The FDIC has developed a streamlined loan modification program. FDIC chairman Sheila Bair wants the Treasury Department to fund a loss-sharing loan guarantee program to facilitate more modifications.

Poorer than expected performance in certain prime adjustable-rate jumbo mortgages issued in 2006 and 2007 deals has led Moody's Investors Service to downgrade some Wells Fargo Mortgage Backed Securities Trust and Bear Stearns tranches while confirming a smaller number of ratings from these deals. Moody's has downgraded 77 tranches from 15 WFMBST transactions and 17 tranches from three Bear deals. It also confirmed 15 tranches from the 15 MFMBST deals and one tranche from three Bear transactions. The ratings reflect an expected loss methodology for the jumbo sector that Moody's revised in September.

Servicers participating in the Hope Now alliance provided loan workouts to a record 225,000 homeowners in October, up 13,000 from the September figure. At the current pace, Hope Now estimates that 2.2 million homeowners will avert foreclosure with the help of a loan workout from their loan servicer this year, an increase of 45% from 2007. Faith Schwartz, executive director of Hope Now, said the data shows that alliance members "are helping more homeowners avoid foreclosure than ever before." The October total included 103,000 loan modifications and 122,000 repayment plans, a monthly record for each category.