Servicing

Home prices continued to decline in four out of every five metropolitan areas during the third quarter, according to the National Association of Realtors. While 28 metro areas showed increases, 120 metro areas saw prices fall and prices were unchanged in four others from one year earlier. NAR President Charles McMillan, a broker in the Dallas-Forth Worth market, said foreclosures are affecting the overall market. "A very large proportion of distressed home sales are taking place at discounted prices compared to more normal conditions a year ago. It's very challenging to understand proper valuation, given the differences between distressed sales and a larger share of traditional homes in sound condition." Data on individual markets is available here: http://www.realtor.org/research/research/metroprice.

The Federal Housing Administration has set aside $12.2 billion in reserves to cover expected losses on its single-family program after closing the books on a record fiscal year in which lenders originated $171.8 billion in FHA-insured loans. The FHA insured portfolio jumped to $479.6 billion in the fiscal year ended Sept. 30, 2008, up from $351.8 billion in FY 2007. And its reserves jumped to $19.7 billion, up from $7.5 billion in FY 2007. The annual FHA management report attributes the sharp rise in "loan guarantee liability" to high default rates on loans with downpayment assistance and house price declines. The nationwide decline in house prices "results in increased claims and lower proceeds from the sale of foreclosed properties," the report says. The FHA report also shows that the capital ratio for the single-family insurance fund fell to 3% in FY 2008, down from 6.4% in the previous fiscal year. By statute, FHA must maintain a 2% capital ratio.

House Democrats are accusing the Treasury Department of "abandoning" Congress' mandate to use part of the $700 billion Troubled Asset Relief Program funds to prevent foreclosures and brushing aside an FDIC program that would use federal loan guarantees to facilitate loan modifications. Treasury Secretary Henry Paulson told a House panel that he continues to look for a TARP foreclosure prevention program that "strikes the right balance" between protecting taxpayers and being effective. Federal Reserve Board Chairman Ben Bernanke testified that the Federal Deposit Insurance Corp. has developed a "very promising approach." However, he has concerns that the "government might be liable for $100,000" in some modifications if a homeowner with large negative equity simply abandons the property. Secretary Paulson noted that Fannie Mae, Freddie Mac and the Hope Now servicers have adopted a streamlined loan modification approach modeled after the FDIC program. But House Financial Services Committee chairman Barney Frank, D-Mass., argued that such initiatives are not a "substitute" for developing a TARP foreclosure reduction program.

Citigroup's latest planned global headcount reduction will include some unspecified positions in the mortgage area but the company considers itself to already have made relatively strong progress in reducing more problematic residential RE loans. The company said in a presentation to investors and employees Monday that it has no remaining exposure to payment-option adjustable-rate mortgages, and the $218 billion of remaining residential RE loans it has represent 11% of its assets. Some competitors still have some option ARM exposure and mortgages represent from 13% to 25% of their assets, Citi said. The company plans to cut its headcount to about 300,000 from 352,000 at the end of the third quarter. Attrition and previous announced divestitures will make up a significant portion of the cuts.

The First American Corp., Santa Ana, Calif., said it has introduced what it believes is the first "reverse mortgage score," a data-based numerical value designed to help servicers quantify the likelihood that struggling senior borrowers can avoid foreclosure on their current loans by qualifying for government-insured Home Equity Conversion Mortgages. The score, introduced at the National Reverse Mortgage Lenders Association conference in Los Angeles, examines factors specific to the government reverse mortgage program such as the new $417,000 HECM national loan limit, the number of borrowers on the loan and their ages, living trusts and powers of attorney. It also examines homeowner and property information from First American's data repository. The combined examination of these factors results in a weighted average score ranging from one to five in which "one" indicates the borrower is "least likely" to qualify for a HECM and "five" indicates the loan is "most viable," an external spokesman said. The spokesman also said score may be helpful to originators as well as servicers.

Congress needs to pass legislation that "unlocks" securitized trusts so servicers could sell distressed mortgages to the Treasury Department for restructuring, according to a former Treasury official in the Clinton administration. Michael Barr told a House panel that the Real Estate Mortgage Investment Conduit statute could be amended so that mortgage-backed securities investors don't face a tax penalty when loans are sold to Treasury, which is administering the Troubled Asset Relief Program. "We need to free servicers from the conflicting requirements and give them an incentive to sell mortgages to Treasury for refinancing and foreclosure avoidance," he testified. Mr. Barr is a law professor and a senior fellow at the Center for American Progress, a liberal think tank. He served as a special assistant to former Treasury secretary Robert Rubin and as Treasury deputy assistant secretary for community development (1997-2000). His testimony could signal options that the President-elect Obama's transition term is considering. Mr. Barr also supports a Federal Deposit Insurance Corp. plan to guarantee modified loans. "FDIC has proposed a plan to use guarantee authority, and the [Bush] administration should implement it," he said.

Genworth Financial - after recently posting a large third quarter loss - struck a deal over the weekend to buy a $1 billion thrift in Minnesota, which it will use to file an application for a capital infusion under the $700 billion bailout bill. Genworth of Richmond, Va., also owns a mortgage insurance division, which it is considering selling. At press time a Genworth spokesman had not returned a telephone call about the thrift purchase. In conjunction with its planned purchase of InterBank FSB of Maple Grove, Minn., Genworth also has filed a savings and loan holding company application with the Office of Thrift Supervision. To participate in the Treasury's capital purchase program, it must first file an application with OTS. Last week Genworth said it has borrowed $930 million of a $1.7 billion credit line.

Chevy Chase Bank of Bethesda, Md., a top 40 ranked residential funder, could be in play, according to combined press reports. In a statement, the thrift's executive vice president, Thomas H. McCormick, declined to comment on the reports, saying, "Not surprisingly rumors have risen from time to time over the years about the interest of other banks in seeking" to acquire the lender/servicer. Among servicers, CCB ranks 36th nationwide, according to the Quarterly Data Report. The depository is privately held, controlled mostly by developer B.F. Saul and members of his family. The Saul family fortified the thrift's capital position two decades ago during the height of the S&L crisis.

The key to combating mortgage fraud is "regulation, regulation, regulation," the director of research and policy for the Community Law Center told attendees at SourceMedia's Mortgage Fraud Conference in Las Vegas. Robert J. Strupp said part of the problem is that existing laws were not enforced. He warned against what he called "self-proclaimed" loss mitigation specialists and "certified" foreclosure consultants. No state certifies foreclosure consultants, Mr. Strupp declared, adding, "In my opinion, this whole industry needs to be regulated and it is not." Rodney Nelsestuen, research director for TowerGroup, took an opposite position on increased and detailed regulation. At first, he said, it can be prescriptive in dealing with the problem, but in the end it will fail because the prescription will provide fraudsters with a road map to get around the problem. Any solution to fraud needs to be principal-based, Mr. Nelsestuen said.

Residential loan modifications could be ripe for mortgage fraud, according to panelists speaking at a SourceMedia mortgage conference in Las Vegas. Gary Lacefield, executive vice president and director of compliance at WR Starkey Mortgage of Texas, said part of the problem is that lenders are modifying loans, keeping homeowners in a product that was not suitable for them in the first place. The modification continues the predatory pattern and practice, he said. Al Macdonald, chief executive and founder of NominoData, when asked about borrowers who were involved in mortgage fraud, said before just simply modifying the loan, the originator should re-screen the borrower to make sure there was not fraud. He later said that technology is merely a tool to help catch fraud. Lenders need to be constantly monitoring their systems to make sure technology is filling the role that was originally intended.