Servicing

Large cities in California and Florida - including Los Angeles and Miami - continue to face a "high" risk of near term declining home prices, according to a recent report issued by the PMI Group. Of the 16 'metropolitan statistical areas' the company grades as "high" risk, eight are in California, five in Florida, and one each in Arizona, Nevada and Rhode Island. Factors feeding expected home price declines include foreclosures, unemployment and how much equity a borrower has in his/her home. In California, the only bright spot PMI found is that the inventory of homes for sale is beginning to decline. In June there was a 7-month average supply of unsold homes compared to 14.1 months in November 2007.

House Financial Services Committee chairman Barney Frank, D-Mass., is demanding that other major servicers follow Bank of America's model and adopt plans for "immediate mass modifications" to stem the flood of foreclosures. Rep. Frank also put 10 major banks and servicing companies on notice that they are expected to report to his committee by Oct. 17 on their plans to adopt a systematic approach to loan modifications. "Hope Now and other industry initiatives have had too little impact to meet the large and growing need for widespread relief," Rep. Frank says in a letter to the companies and industry trade groups. The committee chairman stresses the BoA/Countrywide settlement agreement to modify nearly 400,000 subprime and payment-option mortgages should serve as a template for the rest of the industry. "It is essential that every mortgage servicer firmly commit to implement plans for immediate mass modifications based on, or stronger than, the measures BoA/Countrywide has undertaken," Rep. Frank says in the Oct. 8 letter.

Asset managers interested in working for the Treasury Department will have to submit a proposal to handle either whole loans or mortgage-backed securities by 5 p.m. EST Oct. 8. In outlining its selection process, Treasury officials stress that they will be racing to sign up asset managers. "Given the urgent need to implement the Troubled Assets Relief Program quickly, the selection process for asset managers may involve extremely short deadlines for submitting information and for traveling to Washington, D.C. for meetings and interviews," a Treasury memo says. Meanwhile, securities asset managers will be expected to purchase and manage MBS backed by prime, alternative-A, subprime, and commercial real estate mortgages. In addition, they will be expected to manage "MBS collateralized debt obligations, and possibly other types of securities acquired to promote market stability." Whole loan managers will also handle a range of products, including residential first mortgages, home equity loans, second-lien loans, and CRE mortgages.

Bank of America, which saw its credit losses more than double to $6.45 billion in the third quarter, is blaming the carnage on delinquent consumer loans, including home mortgages -- but also lines of credit it extended to homebuilders. The bank -- whose results now include the Countrywide Home Loans franchise -- also wrote down the value of its Fannie Mae and Freddie Mac preferred stock by $320 million. It now holds $13.36 billion in nonperforming loans, a stunning 300% increase over the past 12 months. (It's believed that part of the increase is attributable to the whole-loan portfolio it inherited when it bought Countrywide.) BoA said it modified 73,000 mortgages for customers during the quarter -- compared with 14,000 in the same period a year ago. Despite the monumental charges, the bank earned $1.18 billion in the third quarter, including $259 million in "operating" earnings from Countrywide.

Citigroup and Wells Fargo moved their arguments over who has a valid deal to acquire Wachovia into several courtrooms over the weekend. On Oct. 4, Justice Charles Ramos of the Supreme Court of the State of New York issued an order giving Citi emergency injunctive relief extending the exclusivity agreement with Wachovia until further order of the court. Under the order, Citi and Wachovia must appear before the judge on Oct. 10. In a statement, Citi said it is prepared to resume negotiating in good faith to complete the transaction. The next day, a New York State appellate court vacated the Oct. 4 order. A statement from Wells Fargo said it was "pleased that the unfounded order entered yesterday has been vacated. Wells Fargo will continue working toward the completion of its firm, binding merger agreement with Wachovia Corp." In its own statement, Wachovia said Citi "is always free to make a superior offer to Wachovia." Furthermore, two Wachovia shareholders, Mary Louise Guttmann and Leslie M. "Bud" Baker, say they have obtained a temporary restraining order from Mecklenburg County (N.C.) General Court of Justice, Superior Court Division, prohibiting Citi from taking legal action to enforce any provisions regarding the exclusivity limitations.

Freddie Mac is increasing its loan fees on interest-only mortgages starting Jan. 2 and tightening its rules on appraisals and streamlined refinancings involving "piggyback" loans. In a Freddie Mac Update, the secondary-market agency told lenders that it is planning several changes in loan pricing and credit requirements. Starting Jan. 2, Freddie will "no longer allow the new mortgages to pay off subordinated financing" in a streamlined refinancing of a piggyback loan. In purchasing loans on a flow basis, Freddie will require updated appraisals for loans delivered more than 120 days after origination. Seasoned mortgages sold more than 365 days after origination will no longer be purchased on a flow basis. Freddie will purchase those seasoned loans in bulk sales.

The Treasury secretary will be able to use loan guarantees and credit enhancements to facilitate loan modifications under the newly passed Emergency Economic Stability Act, which gives the Treasury broad authority to purchase $700 billion of troubled mortgage assets. Such guarantees may give the Treasury a carrot to get institutions to modify their loans without directly acquiring the loans. "It has the ability to create incentives to leverage the private sector with minimal initial cash outlays," said FDIC Chairman Sheila Bair. "I am particularly pleased the bill includes provisions for loan guarantees and credit enhancements on whole loans." The Treasury is expected to conduct its first auction to purchase troubled assets in about four weeks, and it is planning to hire 5-10 asset managers to service and modify the assets, sources say. In addition to private asset managers, the Treasury also can contract with Federal Deposit Insurance Corp. to manage residential mortgages and mortgage-backed securities.

The House of Representatives, by a vote of 263-171 early Friday afternoon, approved a $700 billion rescue package of the credit and mortgage markets paving the way for the bill to be sent to President Bush. The president signed the bill almost immediately and thanked members of Congress for passing the legislation so quickly. "By coming together on this legislation, we have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country." Mr. Bush warned, however, that it will take time to implement an effective troubled-asset purchase program and it will take some time before it has an impact on the economy. Treasury Secretary Henry Paulson said he will move rapidly, but carefully, in implementing the new tools provided in the rescue bill. "In the coming days, we will work with the Federal Reserve and the FDIC to develop strategies to deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system," the secretary said. Rep. Judy Biggert, R-Ill., said during the debate Friday that market volatility, changes to the bill, regulatory commitments, and Republican attempts to limit its price tag helped persuade her to come on board after voting no on Monday. "I reluctantly support the bill and look forward to revisiting the issue as Congress monitors the program to ensure that we minimize risks and that taxpayers see a return on this investment," she said.

UBS said Friday that it will "substantially downsize real estate and securitization" as part of a "repositioning" of its investment bank. "UBS has already taken a number of actions to reduce its balance sheet, implement a new market-based funding model, and reduce risk and headcount," the company said. "Today's announcement will lead to further reductions, with the aim of bringing the cost base to a more sustainable level." In total, UBS said its investment bank "will reduce net headcount by an additional 2,000, bringing staffing levels to approximately 17,000 by year-end, a reduction of around 6,000 since the peak in third-quarter 2007." It added that the reductions "will be predominantly targeted to businesses being exited or downsized in order to protect and sustain our core client franchises." The company had said Thursday that it has been making progress reducing its problematic mortgage-related exposures and has estimated that it will produce a small profit in the third quarter.

The delinquency rate on closed-end home equity loans rose 22 basis points in the second quarter at commercial banks, according to the American Bankers Association. In the second quarter, 2.56% of home equity loans were at least 30 days past due, up from 2.34% in the first quarter. However, the overdue rate on home equity lines of credit actually fell 2 bps to 1.08% in the second quarter, according to the ABA's Consumer Credit Delinquency Bulletin. ABA chief economist James Chessen said the rise in delinquencies on home equity loans reflected continued weakness in the housing sector and helped push up the ABA's composite consumer loan delinquency rate by 6 bps to 2.68% for the second quarter.