Servicing

The increase in troubled residential mortgages and construction loans is far from over, and more banks will run into problems and fail this year, according to Sheila Bair, chairman of the Federal Deposit Insurance Corp. "You simply must accept that the credit downturn is far from over," the FDIC chairman told the Florida Bankers Association. "It's a tough slog, but there's no easy way out." Ms. Bair stressed that it is critical for banks and thrifts to get control of their balance sheets, raise capital, and pay particular attention to liquidity. "Asset quality problems are putting pressure on the funding side of the balance sheet" Ms. Bair said. And she noted that liquidity problems have contributed in "varying degrees" to the failures of 10 banks this year. The FDIC chairman also stressed that the deposit insurance fund is "strong" and that she does not expect the FDIC will need to borrow against its line of credit with the U.S. Treasury to cover additional losses. To ensure that that doesn't happen, the FDIC board will consider a premium increase in October, she said.

Close to 30% of all subprime residential mortgages were delinquent or in foreclosure at midyear, according to exclusive survey figures compiled by National Mortgage News and the Quarterly Data Report. NMN found that 29.92% of all outstanding subprime loans were delinquent. (Included in the figure is a foreclosure rate of 10.86%.) The findings are based on surveys filed by nine different subprime servicers with a combined portfolio of 2 millions loans. The firm with the highest delinquency rate was Aurora Loan Services, Littleton, Colo. (40.66%). American Home Mortgage Servicing, Irving, Texas, had the lowest rate, 23.84%. Many of the nine firms are "scratch-and-dent" specialists that receive fee income from investors for handling their bad loans. NMN's subprime findings were close to those released by the Mortgage Bankers Association on Friday. The MBA found that 30.48% of subprime loans were delinquent, including 11.81% that were in foreclosure.

The percentage of loans that were delinquent or in foreclosure rose to a record 9.16% during the second quarter, an all-time high. During a conference call with reporters, Jay Brinkmann, the new chief economist at the Mortgage Bankers Association, said that both the overall delinquency rate of 6.41% and the foreclosure inventory of 2.75% represented record highs for the MBA survey. The foreclosure inventory is up 135 basis points from the level recorded a year earlier and 28 bps from that of the first quarter. Mr. Brinkmann said the deterioration in credit quality continues to be driven by conditions in California and Florida. Those two states accounted for 39% of all foreclosures started in the second quarter and 73% of the increase in foreclosures, he said. The MBA can be found online at http://www.mortgagebankers.org.

Twenty-five classes of notes issued by four collateralized debt obligations with exposure to subprime residential mortgage-backed securities have been downgraded by Fitch Ratings. All the downgraded classes were removed from Rating Watch Negative. The affected securities are as follows: nine classes from Norma CDO I Ltd., a hybrid cash and synthetic arbitrage CDO; six classes from GSC ABS CDO 2006-4u Ltd., a hybrid cash and synthetic arbitrage CDO; five classes from Fort Point Funding II Corp., a cash flow structured finance CDO; six classes from Straits Global ABS CDO I Ltd., a cash flow CDO; and five classes from Saybrook CBO II Ltd., a structured finance CDO. The downgrades were attributed to collateral deterioration in the portfolios, especially in subprime RMBS, or underlying exposure to subprime RMBS.

Residential Credit Solutions Inc., Fort Worth, Texas, has been added to the Standard & Poor's Select Servicer List as a residential subprime and special servicer. S&P admits servicers to the list based on a positive assessment of their financial position, regulatory compliance, and management strengths, RCS said. "RCS provides high-touch special servicing for its bank and thrift partners and owners of mortgage credit risk that need additional servicing capacity to manage at-risk, subperforming, and nonperforming residential loans," the company said. The company is backed by Equifin Capital Partners, a private equity firm, and Och-Ziff Capital Management Group, an alternative asset manager. The companies can be found online at http://www.residentialcredit.com and http://www.standardandpoors.com/ratings.

First American Field Services and First American Real Estate Tax Service have announced the availability of a new vacant-property registration service aimed at helping lenders and servicers comply with changing municipal ordinances. The service identifies properties in a lender's servicing or real-estate-owned portfolio that require vacant-property registration and then manages the registration process, including the disbursement of fees. "As new ordinances are passed in various jurisdictions, our vacant-property registration database is updated and we are able to revise the registration information on behalf of our clients as needed," said Paul Dauterive, president of First American Field Services. ".... This new service reduces the lender's risk of compliance-related penalties by ensuring that all necessary properties remain properly registered throughout the default process." The First American Corp., the Dallas-based parent company of the two units, can be found online at http://www.firstam.com.

The long-term rate-indicative 10-year Treasury yield has fallen below 3.7% for the first time since spring. The benchmark yield was 3.66% at noon on Thursday, according to Yahoo Finance. The move to a lower yield was "influenced by deal flow that generated rate lock unwinds and spreads widening" in agencies, mortgages, and credit default swaps, according to a Sept. 4 U.S. Treasury market report by the fixed-income division of Jefferies & Co., a securities firm.

In response to Hurricane Gustav, the Department of Housing and Urban Development has declared a 90-day moratorium on Federal Housing Administration foreclosures in the Gulf Coast disaster areas. "HUD is ready to support families in getting back on their feet as quickly as possible," HUD Secretary Steve Preston said. "One way to do that is call a time-out on foreclosures in these disaster areas and call on the rest of the mortgage lending community to follow suit." The moratorium applies to counties that have been declared disaster areas by the federal government. Freddie Mac told its servicers to be lenient with Gulf Coast homeowners and that they have the "discretion to reduce or suspend mortgage payments or foreclosures for up to 12 months." Fannie Mae has told its servicers they can suspend or reduce borrowers' mortgage payments for up to four months or offer loan repayment plans that may extend up to 18 months, a company spokeswoman said. Fannie servicers also have the discretion to suspend foreclosures on a case-by-case basis.

GMAC Financial Services shocked the market Wednesday, announcing that it will close all 200 of its retail residential branches and cease table funding through its broker division, Homecomings Financial. According to figures compiled by National Mortgage News and the Quarterly Data Report, GMAC's mortgage division, Residential Capital LLC of Minneapolis, ranks sixth nationwide among all home mortgage originators. The company said it will still fund loans on a correspondent basis and through what it calls "direct lending channels." In total, 5,000 mortgage jobs (60% of the work force) will disappear. "While these actions are extremely difficult, they are necessary to position ResCap to withstand this challenging environment," said new ResCap chairman and chief executive Tom Marano. "Conditions in the mortgage and credit markets have not abated and, therefore, we need to respond aggressively by further reducing both operating costs and business risk." ResCap is also the nation's 10th-largest servicer, with $449 billion in receivables. ResCap can be found online at https://www.rescapholdings.com.

GMAC Financial Services says its overall residential loan production may not drop by much despite the fact that it is closing its wholesale and traditional retail branches [see item below]. A company spokeswoman said Residential Capital will aggressively market its Ditech direct-to-consumer brand and maintain a presence as a correspondent buyer of mortgages. Asked about origination volume, she cautioned, "I don't want to make any predictions, but volumes may not drop much." In the first quarter, ResCap funded $20.8 billion in home mortgages, a 44% decline from the level of a year earlier, according to the Quarterly Data Report. In the first quarter, roughly half its production came through the correspondent channel, with retail and wholesale accounting for about 25% each. (Second-quarter results were not available.) In addition, no breakouts were available for Ditech. "We hope to do a lot of volume," she added. "We stand behind these two channels."