Servicing

Due to lax underwriting on four defaulted Federal Housing Administration loans, the HUD inspector general is recommending that Wells Fargo Home Mortgage indemnify the FHA for the full unpaid balance on the loans -- $816,000. "Wells Fargo could not provide justification for the [Delaware] branch office's noncompliance with Department of Housing and Urban Development requirements," the auditors' report says. The IG auditors found that Wells Fargo's branch office approved the underwriting of two loans without verifying the rental payment histories of borrowers and another loan that overstated the borrower's overtime income. On an FHA 203(k) rehabilitation loan, part of the loan proceeds paid for labor performed by the borrower, which violates FHA rules. The four loans were in default within two years of origination. HUD officials can accept, amend, or reject the HUD inspector general's recommendations. As one of the largest FHA lenders, "we are audited periodically by the Office of Inspector General," Wells Fargo said. When loan-level issues are uncovered, Wells Fargo, OIG, and HUD officials "arrive at the appropriate resolution, such as indemnification or reimbursement."

The residential primary specialty-reverse mortgage servicer rating of Financial Freedom Senior Funding Corp. has been upgraded from RPS5 to RPS3 by Fitch Ratings for subprime loans. The rating has been placed on Rating Watch Evolving. Financial Freedom is a wholly owned subsidiary of IndyMac Federal Bank (see item above). "The rating actions reflect the operational capabilities of the existing servicing platform, and the financial backing of the FDIC," Fitch said.

Fitch Ratings has assigned RPS3 residential primary servicer ratings for prime, alternative-A, and subprime loans to Indymac Federal Bank FSB, the successor to the defunct IndyMac Bank. In addition, Fitch assigned the company an RSS3 residential special servicer rating. The ratings were placed on Rating Watch Evolving. "The rating actions reflect the operational capabilities of the existing servicing platform, and the financial backing of the FDIC," Fitch said. The Federal Deposit Insurance Corp. was appointed conservator of the bank after IndyMac Bank was closed by the Office of Thrift Supervision. (Fitch's servicer ratings of IndyMac Bank have been withdrawn.) Fitch rates residential servicers on a scale of 1 to 5, with 1 being the highest rating. The rating agency can be found online at http://www.fitchratings.com.

The sales of existing homes, including single-family homes and condominiums, fell 0.8% to a seasonally adjusted annual rate of 4.91 million units in the second quarter and were down 16.3% from 5.87 million a year earlier, according to the National Association of Realtors. The NAR stressed, however, that resales rose in 13 states, largely as a result of buyer response to discounted home prices. Out of 150 metropolitan statistical areas, 115 recorded declines in median single-family resale prices from levels recorded a year earlier. The median resale price stood at $206,500, down 7.6% from $223,500 in the second quarter of 2007. NAR president Richard Gaylord, a broker with RE/Max Real Estate Specialists in Long Beach, Calif., said foreclosures are distorting the price data. "In many areas with large concentrations of foreclosure sales, homes are being purchased below replacement-cost values," Mr. Gaylord said. ".... Once the inventory is drawn down, price pressure will return because the costs of construction are rising -- today's buyers are very well positioned to build wealth over time." The NAR can be found online at http://www.realtor.org.

CSC, a provider of technology based in Falls Church, Va., has announced the introduction of Borrower Inquiry, a tool designed to enable homeowners facing foreclosure to track the status of their requests for help from their mortgage servicers. The company said this capability will also help expedite workout requests by substantially reducing inbound calls to servicers and freeing up resources. The inquiry tool, which can be used by any servicer, informs borrowers of progress in accordance with the Hope Now Servicer Guidelines released in June. The borrowers can use a secure website to access updates from mortgage servicers on the status of their workouts. CSC said Borrower Inquiry is the first of several planned default management tools the company is designing to facilitate workouts and improve loss mitigation process efficiency. CSC can be found online at http://www.csc.com.

The Federal Home Loan Bank of San Francisco has finally launched its foreclosure prevention program, which provides matching grants to cover lender costs of refinancing or restructuring subprime mortgages into fixed-rate 30-year mortgage. The FHLBank will provide up to $25,000 for each restructuring, but the lender has to put up $2 for every $1 in grant monies. The $10 million pilot was approved by the Federal Housing Finance Board in January, but the FHLBank regulator did not give final clearance until this summer. The program is designed to help low-income homeowners who cannot afford the reset on their mortgage. The recently passed housing bill authorizes the FHLBanks to use affordable-housing funds to assist and refinance troubled borrowers. The San Francisco bank can be found on the Web at http://www.fhlbsf.com.

The 12 Federal Home Loan Banks have reported combined earnings of $718 million for the second quarter, up 14.3% from the level recorded a year earlier despite the Chicago FHLBank's posting of a $74 million loss. The FHLBanks exhibited no growth in advances or assets from the levels of the first quarter, and the 12 banks ended the second quarter with $913.9 billion in total advances and $1.3 trillion in total assets. However, the second-quarter report shows a 15% increase in investments of mortgage-backed securities issued by the government-sponsored enterprises Fannie Mae and Freddie Mac. As of June 30, FHLBank investments in GSE MBS totaled $86.6 billion, up 15% from the level of the first quarter and 57% from that of Dec. 30. Back in March, the FHLBank regulator lifted a cap on GSE MBS investments to provide additional liquidity for the MBS market. The FHLBanks also held $76.8 billion in private-label MBS as of June 30, and some banks recorded losses on those investments. Meanwhile, the Atlanta FHLBank said it has suspended its Mortgage Purchase Program, and the Chicago FHLBank stopped buying single-family mortgages from its members Aug. 1 in an effort to conserve capital. The Des Moines FHLBank has temporarily stepped in and agreed to buy up to $150 million single-family mortgages from Chicago members.

Foreclosure filings increased 8% in July and were 55% higher than the level recorded a year earlier, according to RealtyTrac, an online foreclosure marketplace based in Irvine, Calif. The company's U.S. Foreclosure Market Report indicates that foreclosure filings -- default notices, auction sale notices, and bank repossessions -- were reported on 272,171 properties in July. "Bank repossessions, or [real estate owned], continued to be the fastest-growing segment of foreclosure activity in July, posting a 184% year-over-year increase -- compared to a 53% year-over-year increase in default notices and an 11% year-over-year increase in auction notices," said James J. Saccacio, RealtyTrac's chief executive officer. "The sharp rise in REOs, combined with slow sales, has resulted in a bloated inventory of bank-owned properties for sale." The company reported that Nevada, California, and Florida recorded the highest foreclosure rates in July. RealtyTrac can be found online at http://www.realtytrac.com.

Three tranches issued by Merrill Lynch Mortgage Investors Trust series 2006-SD1, which is collateralized mainly by "scratch-and-dent" mortgage loans, have been downgraded by Moody's Investors Service. The downgrades were as follows: class M-2, from A2 to B2; class M-3, from Baa2 to Caa1; and class B, from Ba2 to C. Moody's said the actions are part of a wider review of all residential mortgage-backed securities transactions "in light of the deteriorating housing market and rising delinquencies and foreclosures." Many scratch-and-dent pools originated since 2004 are experiencing higher-than-expected rates of delinquency, foreclosure, and real estate owned, the rating agency said. Moody's can be found on the Web at http://www.moodys.com.

The Federal Home Loan Bank of Chicago has recorded a $74 million loss for the second quarter, compared with a $78 million loss in the previous quarter, and the bank expects to report losses in "subsequent quarters," according to a securities filing. The FHLBank blamed the continuing losses mainly on a $30 million impairment loss on its investments in subprime mortgage-backed securities and $35 million in derivative and hedging costs related to its $33.5 billion Mortgage Partnership Finance portfolio. However, the bank's president and chief executive, Matthew Feldman, says he hopes the second quarter will be a "turning point" for the Chicago bank, which has $92.8 billion in assets. The FHLBank is expanding its advance business as it sheds MPF single-family loans that it purchased from members and other FHLBanks. In the second quarter, advances rose 6% to $34.7 billion and exceeded MPF loans for the first time since 2002. The Chicago bank stopped buying mortgage loans on Aug. 1, and other FHLBanks have stepped in to buy loans from Chicago members and keep the MPF program going.