Servicing

The liquidity provided by private-label mortgage-backed securities fueled aggressive lending practices that have contributed to rising defaults and foreclosures, according to a Government Accountability Office study.The GAO study indicates that underwriting standards deteriorated from 2000 to 2006 along with the increase of adjustable-rate mortgages and limited- or no-documentation loans. "Growth in the market for private-label MBS beginning in 2003 provided liquidity to some brokers and lenders to support these aggressive lending practices," the congressional watchdog agency says. The National Association of Mortgage Brokers said the GAO study shows that securitization and too much liquidity led to aggressive practices by banks and other lenders. "Mortgage brokers are not to blame for the meltdown in the subprime market," NAMB president George Hanzimanolis said. The study points out that mortgage brokers accounted for 60% of originations in the subprime market and 25% in the prime market in 2005.

Rep. Paul Kanjorski, D-Pa., has introduced a mortgage servicing and appraisal reform bill that he plans to attach to a comprehensive predatory lending bill the House Financial Services Committee is expected to mark up this fall."This bill helps to protect consumers by improving mortgage servicing, enhancing appraisal quality and standards, ensuring better appraisal oversight, and requiring escrows for those mortgages where borrowers are more likely to experience difficulty in budgeting for the often substantial cost of taxes and insurance," Rep. Kanjorski said. The second-ranking Democrat on the Financial Services Committee has been working on servicing and appraisal reforms for several years as a result of a major developer scam in his Pennsylvania district that led to scores of foreclosures. One aim of the bill (H.R. 3837) is to address the lack of escrow accounts on subprime loans. Lenders would be required to provide an estimate of taxes and insurance when borrowers apply for a mortgage so that they understand the annual costs if they opt out of establishing an escrow account at closing. The bill also attempts to shield appraisers from lender pressure and updates the Real Estate Settlement Procedures Act to create new servicing protections for consumers and increases penalties for violations.

The Senate Banking Committee has approved a five-year extension of the National Flood Insurance Program and a seven-year extension of the federal government's terrorism insurance program in strong bipartisan votes.By a 21-0 vote, the committee passed the NFIP extension bill that would forgive $21 billion in debt accumulated by the flood insurance program in the 2005 hurricane season and phases out subsidized premiums for vacation homes and properties with repetitive flood losses. The Senate bill does not expand coverage to include wind damage, as a House-passed flood bill did, because committee leaders are uncertain of the costs and concerned that it would sink the bill. By a 20-1 vote, the committee approved an extension of the Terrorism Risk Insurance Act that the Bush administration says it can support. The House is working on a 15-year extension of TRIA along with expanding coverage to include nuclear, biological, chemical, and radiological acts of terrorism. The Senate bill includes a study of such expanded coverage.

Subprime servicer NovaStar Financial, Kansas City, Mo., has agreed to sell its servicing portfolio to an affiliate of Morgan Stanley & Co. for $175 million in cash.According to the Quarterly Data Report, at the end of June NovaStar serviced $15 billion in subprime loans, ranking 19th nationwide. The publicly traded NovaStar said it would use the proceeds to reduce debt. "As we continue to endure a difficult period for the mortgage industry and the secondary market for mortgage loans, our focus is on managing our portfolio of mortgage securities, along with brokering loans with a retail team that continues to serve homeowners," NovaStar president Lance Anderson said in a statement. NovaStar added that it is evaluating "the impact of this transaction on its servicing organization, including its servicing work force of approximately 300 persons, but expects that substantial reductions in both its organization and work force will result." NovaStar can be found online at http://www.novastarmortgage.com.

DRI Management Systems Inc., a provider of default management software based in Newport Beach, Calif., and Artemis Enterprises LLC, Chicago, announced an alliance at the Mortgage Bankers Association convention that offers single-source access to process and information management technology.Mutual clients will gain "substantial cost saving benefits" through time efficiencies and reduction in the risk associated with untimely and inaccurate communication errors, the companies said. "The combination of process and cross-enterprise contact and content data management has never been offered in this industry before," said Mary Hunter, president and chief executive officer of Artemis. The companies can be found on the Web at http://www.dridefault.com and http://www.artemisinfo.com.

Nomura Holdings Inc., Tokyo, has officially closed the remainder of its U.S. residential mortgage-backed securities business, an area that has seen heavy cuts, noting that it is taking an RMBS-related loss of about 73 billion yen (approximately $621 million) for its fiscal second quarter.Nomura, the corporate parent of a New York-based Wall Street firm, said the closure is part of a larger U.S. reorganization that involves cutting its regional headcount from 1,300 to 900 at the end of March. Nomura said restructuring costs, in combination with the RMBS-related loss, are expected to result in a consolidated pretax loss for Nomura in the fiscal second quarter of around 40 billion-60 billion yen (approximately $340 million-$511 million). "Nomura has faced challenges in the U.S. residential mortgage-backed securities market which have led to these disappointing results," said Nobuyuki Koga, president and chief executive officer. "However, we have moved decisively to deal with the issue and have avoided further and protracted losses by taking firm and immediate action."

Standard & Poor's Ratings Services has announced downgrades on 402 classes of U.S. RMBS backed by first-lien subprime mortgage loans issued in the first three quarters of 2005.The classes, from 138 residential mortgage-backed securities deals, total approximately $4.6 billion of original par amount. S&P said that represents 1.45% of the $320 billion original par amount of such subprime RMBS that it rated from the first to the third quarter of 2005. S&P also affirmed the ratings on securities from the same period that represent $252.4 billion original par value of first-lien subprime U.S. RMBS. The rating agency attributed the downgrades to expectations of further losses, the resulting reduction in credit support, and continued declines in home values. In addition, the transactions allow the release of credit support on certain "step-down" dates, and therefore "we believe these securities will be more vulnerable to losses going forward, as there may not be enough credit support to withstand future losses," S&P said. The rating agency can be found online at http://www.standardandpoors.com.

Wells Fargo & Co., San Francisco, has reported that a $1.2 billion mark-to-market gain on financial instruments used to hedge its mortgage servicing rights more than offset a $638 million decline in the value of its MSRs during the third quarter, helping the company's mortgage business generate double-digit earnings growth despite lower origination volume.Wells Fargo valued its MSR asset at 1.35 basis points of the outstanding dollar volume of loans serviced for others, the lowest valuation ratio the company has recorded in eight quarters. Mortgage origination volume totaled $68 billion in the third quarter, down by $9 billion from the prior-year quarter. Wells Fargo owned the servicing rights on $1.48 trillion of home loans, up 11% from one year earlier. Overall, the company earned $2.28 billion in the third quarter, up 4% from the third quarter of 2006. The company can be found online at http://www.wellsfargo.com.

Thirty states reported that real-estate-owned filings dropped from August to September, according to ForeclosureS.com, a Fair Oaks, Calif.-based investment advisory firm.Among states with high foreclosure numbers that recorded a decline in September were California (down 14.2%), Colorado (down 58.0%), Florida (down 14.2%), Michigan (down 21.1%), and Ohio (down 29.2%), the company reported. "Despite what some other data aggregators are saying, the big news is that many states, including some typically hit hard by rising foreclosures, actually saw a drop in the number of people who lost their homes to foreclosures last month," said Alexis McGee, president of ForeclosureS.com. The company can be found online at http://www.foreclosures.com.

Ginnie Mae has finally decided that the new Federal Housing Administration Secure mortgages should be placed into new multiple-issuer pools under the Ginnie Mae II mortgage-backed securities program.These special Ginnie II pools will consist of mortgages that are available to delinquent homeowners who want to refinance into a fixed-rate FHA loan. It will also include FHASecure loans in which a conventional borrower refinances into an FHA mortgage and the lender takes out a "silent" second mortgage to cover closing costs or reduce the principal amount to meet FHA requirements. Ginnie Mae officials have been wrestling with the issue of how to deal with new mortgages since President Bush announced the FHASecure program just before Labor Day. Bond traders opposed placing FHASecure mortgages in Ginnie I MBS or even putting them into a standard Ginnie Mae II pool and limiting them to 5% or 10% of the pool. Ginnie Mae said in a notice to MBS issuers that it would start guaranteeing FHASecure pools Dec. 1.