Servicing

Senate Banking Committee chairman Christopher Dodd, D-Conn., said he will try to pass a change to bankruptcy laws during the lame-duck session that would allow a judge to restructure a mortgage on a primary residence in foreclosure. At a committee hearing, Sen. Dodd indicated the bankruptcy change would be temporary - possibly three to five years - but is necessary to deal with the nation's foreclosure crisis. Wells Fargo Bank executive vice president Jon Campbell warned that investors would likely demand higher downpayments and pricing on home loans to offset cramdowns. Sen. Dodd said he has heard arguments that such a bankruptcy change would affect credit availability for primary residences. "But I just don't see the evidence of that," he said, stressing that cramdowns would be temporary. Congress returns on Monday to consider a stimulus package that would bailout the auto industry. Some observers expect the legislative session will continue into December but note it's impossible to predict if anything will pass in a crisis environment.

The federal government would guarantee up to 50% of any losses on a modified loan that subsequently defaults under a proposal being promoted by the Federal Deposit Insurance Corp. The agency's effort is geared toward modifying 2.2 million non-Fannie Mae/Freddie Mac loans by the end of 2009. "Assuming a re-default rate of 33%, this plan could reduce the number of foreclosures during this period by some 1.5 million at a projected program cost of $24.4 billion," the agency said Friday, revealing details about its plan. The Treasury Department, however, is refusing to back the agency's idea with any of the $700 billion allocated under the Emergency Economic Stabilization Act. Servicers participating in the FDIC program could receive $1,000 for successfully modifying delinquent loans once the borrower makes six payments. In restructuring a loan, the borrower's monthly payment must be reduced to 31% of monthly income. The 50% loan guarantee would apply to modified loans with loan-to-value ratios of up to 100%. "For LTVs above 100%, the government loss share would be progressively reduced from 50% to 20% as the current LTV rises," FDIC says. Modified loans with LTVs above 150% would not eligible for the program. Loan guarantees would expire after eight years.

The Federal Deposit Insurance Corp. hopes to complete a deal to sell a majority of IndyMac Federal Bank in December, according to an agency spokesman. "Our intent is to sell as much of it as possible to one buyer," the spokesman said. It's unclear that if sold, what will happen to the FDIC's loan modification efforts at the thrift. One source said he expected continuation of the loan-mod program to be a pre-condition of a sale. An investment banking source familiar with the transaction said at least two parties are involved in the latest round of bidding for the Pasadena, Calif.-based thrift, once a top player in the alt-A market. The investment banker described the parties as "consortium bids" that have syndicated out their financing. He said there is one lead negotiator for each consortium. The FDIC spokesman declined to discuss the bidding process except to say, "We'll be conducting bidding later this month." The FDIC placed IndyMac into a conservatorship this past summer. The company was formed two decades ago by Countrywide Financial founder Angelo Mozilo.

Residential lenders foreclosed on 662 houses and condominiums in Orange County in October, less than half the July peak and down 37% from September, according to a report in The Orange County Register. The newspaper, quoting ForeclosureRadar.com, said foreclosures have decreased each month since hitting 1,444 in July, though last month's total rose 19% from October 2007. Southern California has been one of the hardest hit areas in terms of home price declines in the U.S. Orange County also served as the headquarters of several subprime lenders. Sean O'Toole, who heads ForeclosureRadar, said it's possible the foreclosure numbers are tapering off because servicers are focusing more on loan modifications than taking over homes.

'Scratch and dent' investor Kondaur Capital Corp. of Santa Ana said it has raised $150 million in new capital from an unnamed New York financial firm. In a statement the Kondaur said the investor, which previously co-purchased loans with Kondaur through other business ventures, is now making a direct "and substantial investment" in the firm. At press time company chairman and CEO Jon Daurio could not be reached for comment. Now that the Treasury Department has abandoned its purchase of troubled mortgage assets, the SnD market is beginning to pick up steam, investors told MortgageWire. (For more details on this development see the Monday edition of National Mortgage News.)

Banks receiving capital injections and other financial support from the federal government should make credit available to their customers and adopt loan modification programs to prevent foreclosures, according to federal banking regulators. "At this critical time, it is imperative that all banking organizations and their regulators work together to ensure the needs of creditworthy borrowers are met," the regulators say in a joint statement. The interagency statement also stresses that lenders and servicers adopt "systematic, proactive and streamlined" loan modification protocols. "Supervisors will fully support banking organizations as they work to implement effective and sound loan modification programs," the regulators say. One recipient of a capital injection, Webster Financial Corp., Waterbury, Conn., said its national bank subsidiary has temporarily suspended foreclosure activity for 90 days. "During these challenging economic times, we feel a heightened responsibility to assist those who are under financial pressure and are threatened with the possibility of losing their homes," Webster chairman and chief executive James Smith said.

Standard & Poor's, in a new report, predicts that subprime losses on 'AAA' rated mortgage bonds may not be as bad as some are projecting. S&P - basing its findings on subprime ABS issued from mid-year 2005 to mid-year 2007 - said the losses on the underlying loans could reach $180 billion but the writedown in the principal loan amount on these securities will be just $85 billion. Analysts at the firm note, "The difference between the projected write-downs and losses reflects the various forms of credit enhancement that support the rated securities, such as subordination, overcollateralization, and excess spread. A principal write-down on the RMBS certificates occurs when the amount of collateral losses exceeds the amount of available credit support."

Despite Fannie Mae posting a $29 billion third quarter loss, Treasury Secretary Henry Paulson believes the company - and its sister GSE, Freddie Mac - are on "stable" financial footing. At a press conference Wednesday, Mr. Paulson said in a few weeks he will share his "views" on the future of Fannie and Freddie. He noted that Fannie's third quarter loss was "in the range of what we expected." Meanwhile, FBR Capital Markets issued a report predicting that Fannie could post losses of $20 billion to $40 billion over the next four quarters. As reported, Fannie Mae executives recently said they are worried that the company's credit facility with the Treasury "may prove to be insufficient," noting that it could run into liquidity problems that would impair its ability to support the mortgage market.

The American Securitization Forum is working on a proposal that will allow MBS servicers to sell delinquent mortgages through the Treasury's Troubled Asset Relief Program. "We believe there is significant opportunity for TARP to purchase individual distressed loans out of mortgage-backed securities trusts, which would give the Treasury Department unlimited discretion to modify the loans," ASF deputy executive director Tom Deutsch told the House Financial Services Committee. The idea comes in the wake of an announcement by the Treasury Department that it likely will not be spending much money on buying troubled mortgage assets after all. Mr. Deutsch noted that whole loans in securitized trusts are not usually sold because of legal, tax, and accounting constraints. However, ASF is trying to work through those issues. "There are opportunities and obstacles for servicers to sell individual distressed loans at discounts to Treasury," he said. "We expect to report out some initial progress on this initiative at the end of this week." Even though Treasury may not spend much of the $700 billion to buy mortgages, Secretary Henry Paulson noted that his agency might engage in what he called "targeted" mortgage purchases.

Data shows nearly one-third of Americans who sold their home in the past year lost money, and that trend is likely to persist, according to Zillow. According to the third quarter Zillow Real Estate Market Reports, which evaluates 163 metropolitan areas, some of the country's largest metropolitan areas are seeing a decline of 9.7% year-over-year in home values with the Zillow Home Value Index currently standing at $202,966. Combined with the overall economic crisis, depreciation in home values is causing additional distress to homeowners who need to sell their property at a loss due to foreclosure or other reasons. Foreclosures made up almost one in five, or 18.6%, of all transactions in the past 12 months. 30.2% of homes sold were sold for a loss, up from 23.7% at the end of the second quarter. In 17 markets - 14 of which are in California - more than half of homes sold in the past year were sold for a loss.