Servicing

Fitch Ratings has moved all its ratings on Countrywide Financial Corp., Calabasas, Calif., from Rating Watch Positive to Rating Watch Evolving. Fitch said the action stems from further disclosures about Bank of America's planned treatment of Countrywide debt after its proposed acquisition. The rating agency said it believes the acquisition will be completed, but that the rating action reflects "uncertainty over the transaction's final structure." Fitch can be found on the Web at http://www.fitchratings.com.

Mortgage-backed securities investors and servicers should start thinking about becoming landlords so a troubled borrower can remain in a house with an option to buy the property back, according to a conservative academic panel that monitors regulation of the financial services industry. The Shadow Financial Regulatory Committee says it would be less disruptive and costly to offer homeowners facing foreclosure a lease in exchange for the deed to the property. Investors would incur a loss as part of the deed-in-lieu transaction, but avoid foreclosure maintenance and resale costs, according to Kenneth Scott, professor of law and business at Stanford University. The shadow committee noted that the Treasury Department's Hope Now initiative does not address the problem of delinquent borrowers with negative equity. This approach "might be able to deal with a large portion of these delinquencies without the taxpayer bailing out the homebuyer or the investor." Mr. Scott said.

A Federal Reserve Board survey has found that banks continue to tighten their underwriting standards on prime mortgages and home equity lines of credit even as demand for these loan products has weakened. About 60% of senior loan officers indicated they had tightened their lending standards on prime mortgages over the past three months, according to the April survey. In a January survey, 55% of respondents reported tightening. The April survey also shows that 70% of respondents tightened their standards on HELOC applicants. In response to "special questions," 50% of loan officers reported tightening terms on existing HELOCs over the past six months, mainly due to declines in house prices. "Large majorities of respondents also cited increased defaults of material obligations under loan agreements, as well as significant changes in borrowers' financial circumstances, as additional reasons for tightening terms on existing HELOCs," the Fed said.

Federal Reserve Board Chairman Ben S. Bernanke came very close to endorsing a bill the House of Representatives is scheduled to vote on this week that would allow the Federal Housing Administration to refinance borrowers with "underwater" mortgages. The widespread decline in house prices requires lenders and servicers to develop new and flexible strategies to prevent foreclosures, the Fed chairman said in an address to the Columbia Business School. "[T]he best solution may be a writedown of principal or other permanent modification of the loan by the servicers, perhaps combined with a refinancing by the FHA or another lender," he said. The House Financial Services Committee approved an FHA refinancing bill (H.R. 5830) by a 46-21 vote May 1 that offers investors/servicers an option to refinance an underwater mortgage into an FHA-insured loan if they agree to write down the loan amount to 85% of the current appraised value. "It's in everyone's interest" to prevent avoidable foreclosures, Mr. Bernanke said, because of the "spillover effects" rising foreclosures can have on the financial markets and broader economy.

Plans for a real estate mortgage investment conduit vehicle for government reverse mortgage loans are moving along, according to Justin Burch, senior mortgage banking analyst at Ginnie Mae. The Home Equity Conversion Mortgage REMIC, which has been discussed for the past six months, "is coming," Mr. Burch told attendees at the Mortgage Bankers Association's National Secondary Market Conference in Boston. He said the financial instrument is the "next critical piece" in the evolution of the secondary market for reverse mortgages.

The chairman of the House Financial Services Committee is pushing for a package that gives the industry incentives to clean up the foreclosure glut, but he told the Mortgage Bankers Association's National Secondary Market Conference in Boston that if the package fails to achieve its aim, mortgage market participants may see much more onerous regulation. The package includes a proposal that would allow loan holders who voluntarily write down the principal amount of loans that borrowers cannot "reasonably" repay to refinance the mortgage into a written-down loan with a Federal Housing Administration guarantee. Rep. Barney Frank, D-Mass., also said he would be holding a hearing later in May that would shed light on why the temporary loan limit increase has not produced more results.

The chairman-elect of the Mortgage Bankers Association has taken Fannie Mae and Freddie Mac to task for "penalizing future borrowers" for the past sins of granting financing to previous borrowers who weren't nearly as deserving. David Kittle, the president of Principle Wholesale Lending, Louisville, Ky., who takes the MBA's reins in October, questioned the need for the government-sponsored enterprises to charge higher fees for loans with smaller downpayments, borrowers with FICO scores between 650 and 680, or on houses located in so-called declining markets. Speaking to reporters at the MBA's National Secondary Market Conference in Boston, Mr. Kittle said, "We're making better loans today than we ever have. So if we're underwriting better, what's the need for the fees?" The MBA officer said the fees are adding $750 to the cost of every $100,000 borrowed, so borrowers who care about cash are opting for loans insured by the Federal Housing Administration. "A FICO score of 660 with 10% down is a good loan, but they've pushed that entire market to the FHA," he said of the GSEs.

The performance of closed-end second-lien mortgages has devolved to the point where they are "basically a writeoff," according to Standard & Poor's managing director Susan Barnes. Speaking at the Mortgage Bankers Association's National Secondary Market Conference in Boston, Ms. Barnes said closed-end seconds are "performing horribly" but that home equity lines of credit are "better" because they are typically originated by banks, which have stronger relationships with borrowers. S&P recently stopped rating seconds, saying it might resume at some point if it were able to get a sense that the asset class's performance had become predictable again. The rating agency can be found online at http://www.standardandpoors.com.

Effective immediately, Fannie Mae is going to offer its lenders better pricing on jumbo mortgages to help jump-start the market, according to chief executive Daniel Mudd. Fannie will price jumbos as if they were securitized in the TBA (to-be-announced) market, he said, but acquire the high-balance loans for Fannie's investment portfolio through the end of the year. Congress has authorized Fannie Mae and Freddie Mac to purchase mortgages above the $417,000 conforming loan limit until Dec. 31. But legislation has already been introduced to permanently increase the loan limit. Mr. Mudd told investors and analysts on a conference call that Fannie Mae will be giving up the "liquidity premium" with the new pricing strategy. But he views it as an opportunity cost to get a "foothold" in the jumbo market.

Fannie Mae has reported a $2.2 billion loss for the first quarter, down from a $3.6 billion loss in the fourth quarter, and said it plans to raise $6 billion in additional capital through offerings of common and preferred stock. The mortgage giant said its also plans to introduce a refinancing option for "underwater" borrowers that allows borrowers with Fannie-owned loans to refinance up to 120% of the property's current value. Fannie Mae's net revenue rose by $700 million in the first quarter to $3.8 billion, but that was offset by fair-value losses and $3.2 billion in credit-related expenses. The government-sponsored enterprise said 43% of its credit losses stem from its $310.5 billion alternative-A mortgage loan portfolio. Fannie also recognized a $1.1 billion loss on its investments in private-label securities backed by alt-A and subprime mortgages. Separately, the Office of Federal Housing Enterprise Oversight has agreed to lower Fannie's capital surplus requirement from 20% to 15% as a result of the stock offering. The regulator also lifted a 2006 consent order Fannie signed in 2006. The GSE can be found online at http://www.fanniemae.com.