Servicing

The Colorado legislature is on track to pass some of the toughest laws in the country governing the conduct of state-licensed mortgage bankers, loan officers, and mortgage brokers in response to the state's foreclosure problems.Several bills coming up for a vote would require the state's 22,000 originators to have a surety bond and errors-and-omissions insurance. These measures would create a "duty of good faith and fair dealing" with borrowers and prohibit unconscionable acts, such as making a loan the borrower cannot afford to repay. A mortgage fraud bill creates a private right of action for borrowers to sue originators and other real estate professionals. There also are penalties for intimidating or coercing appraisers, along with criminal penalties against anyone who knowingly submits a false appraisal. "Colorado's aggressive response to our high foreclosure rate is really going to capture a lot of attention," said Erin Toll, director of Colorado's real estate division.

Granting bankruptcy judges the authority to modify mortgage loans would provide relief to homeowners facing foreclosure who can't get the servicers of mortgage-backed securities to restructure their loans, a consumer bankruptcy attorney has told a House Judiciary subcommittee.Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, testified that about half of the securitized trusts prohibit loan modifications. If Congress amends the bankruptcy code to allow loan modifications, it would "resolve that problem," he said. Steve Bartlett, president and chief executive of the Financial Services Roundtable, warned that giving bankruptcy judges a free hand to modify loans would make mortgage credit "much more expensive and less available to low- and moderate-income people." Rep. Melvin Watt, D-N.C., indicated he would consider changes to the bankruptcy code in putting together a predatory-lending bill.

Massachusetts Gov. Deval Patrick has ordered state banking regulators to seek delays of up to two months on foreclosures against homeowners who have filed complaints with the Division of Banks.The move makes the commonwealth the first state in the country to place a moratorium on repossession proceedings, but it is not unprecedented. Years ago, shortly before adjustable-rate mortgages were approved by federal authorities, states held sway over institutions in their jurisdictions that made what were then known an variable-rate mortgages. And one, Wisconsin, refused to allow lenders to reset loans to higher levels when the market rate moved into double-digit territory. This time around, housing advocates say they expect Gov. Patrick's action to set the pattern for other states. "We will bring the Massachusetts standard nationwide," Bruce Marks, head of Neighborhood Assistance of America, told the Boston Herald. The governor said in a statement that stays would be sought on a case-by-case basis, but Mr. Marks indicated that his group would assist owners who are struggling to make their payments in filing complaints with the state. "It is effectively a moratorium of foreclosures in Massachusetts," he is quoted as saying. "It is a very big deal."

Fannie Mae, which is still trying to get its financial books in order, says it earned $6.35 billion in 2005, a 28% increase from the profits recorded in the prior year.The congressionally chartered mortgage giant said it expects to release results for 2006 later this year. In a filing with the Securities and Exchange Commission May 2, Fannie revealed that its strongest profit growth came in the capital markets area, where it had net income of $2.99 billion, up 42% from that of 2004. Its two other main business segments -- the single-family credit business, and housing and community development -- earned $2.88 billion (up 15%), and $462 million (up 37%), respectively. Fannie Mae can be found on the Web at http://www.fanniemae.com.

The Tennessee Housing Development Agency has announced an offering of $120 million of Homeownership Program Bonds to retail and institutional investors, the largest such offering in six years.The large bond size stems from growing demand for the THDA's 30-year single-family mortgages, the agency said. "A variety of factors have led to the unprecedented demand for THDA's first-time homebuyer program, including more emphasis on training and outreach," said Ted R. Fellman, executive director of the agency. "In addition, we introduced a third mortgage option, giving qualifying homebuyers the ability to choose the program that best meets their individual needs. Homebuyers that choose less downpayment or closing cost assistance receive the lowest mortgage rate." The agency can be found online at http://www.tennessee.gov/thda/index.htm.

Quantum Servicing Corp., the special servicing unit of Clayton Holdings Inc., Shelton, Conn., has been added to the Standard & Poor's Select Servicer List.S&P admits servicers to the list based on a "comprehensive assessment" of their operational capabilities for servicing residential mortgage, commercial mortgage, or asset-backed portfolios. "We see significant demand for independent servicing platforms that can help investors and asset managers maximize value and returns at this stage of the credit cycle," said Keith Johnson, president and chief operating officer of Clayton. "Inclusion on S&P's Select Servicer List is a significant step towards expanding our special servicing business to mortgage-backed security transactions and to diversifying our revenue sources." The companies can be found online at http://www.clayton.com and http://www.standardandpoors.com/ratings.

Meanwhile, Freddie Mac has reported that 82% of the homeowners who refinanced their homes in the first quarter got a mortgage at least 5% larger than the original loan.The percentage was unchanged from that of the previous quarter and a little lower than the 86% level recorded a year earlier, the government-sponsored enterprise said in its quarterly refinance review. "Fixed-rate mortgages averaged 6.2% for 30-year product and 6.0% for 15-year loans during the first quarter of 2007, well below the current rates offered on home equity loans," said Frank Nothaft, Freddie Mac's chief economist. "Home equity loans are generally indexed to a bank's prime rate, currently averaging 8.25%. This interest-rate difference provides a big incentive to borrowers to use cash-out refinance as an alternative to a home equity loan." Freddie Mac can be found online at http://www.freddiemac.com.

Despite a slowdown in home sales and refinancing activity, homeowners extracted $460.1 billion in home equity last year, down only slightly from $461.4 billion in 2005, according to Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard University.The biggest chunk came from cash-out refinancings, Mr. Belsky told the National Association of Home Builders at its semiannual construction forecast conference. According to Freddie Mac data, the number of cash-out refinances was down in 2006, but the amount of cash received at closing totaled $313.9 billion, compared with $270.3 billion in 2005. Based on Mr. Belsky's estimate, homesellers spent $70.2 billion of the cash they pocketed at the closing, compared with $78.7 billion in 2005. Meanwhile, new second-mortgage debt totaled $76.0 billion last year, down from $112.4 billion the previous year. Homeowners continued to use their homes like "piggy banks" last year to support their spending, he said. "This is not likely to be sustained in an environment with prices starting to fall."

Pennant Capital Management LLC, a Chatham, N.J.-based hedge fund with a 7.8% stake in PHH Corp., has called on the company to terminate its agreement to sell out to GE Capital and The Blackstone Group, a private equity giant.Instead, Pennant called on management to separate the company's two main businesses with the spinoff of its fleet management operations. This could boost shareholder returns by as much as 100% over the next three years, Pennant said in a letter to PHH management. "We believe that current conditions of the general mortgage market, the Company-specific circumstances and the tax implications of a sale and break-up of the Company will prevent realization of full value at this time," Pennant said in its letter, signed by managing member Alan Fournier. "We believe that instead, the Company should pursue a tax-free spin-off of the Fleet business." Pennant estimated that this would allow shareholders to realize a combined valuation of $48 to $66 per share over two or three years, a "vastly superior outcome" to the proposed sale to GE Capital. Under a deal announced March 15, GE Capital would acquire PHH for $31.50 a share, a total of $1.7 billion, then sell PHH's mortgage business to Blackstone for an undisclosed amount. PHH is one of the largest independent mortgage banks in the country, with a servicing portfolio of more than $150 billion.

Seven classes from two People's Choice Home Loan Securities Trust securitizations have been downgraded by Fitch Ratings, and three others have been placed on Rating Watch Negative.The downgrades were as follows: series 2004-1, class M-5, from A-minus to BBB-minus, class M-6, from BBB-plus to BB-plus, class M-7, from BBB to BB, and class M-8, from BBB-minus to BB-minus; and series 2004-2, class M-7, from BBB to BB, class M-8, from BBB-minus to BB-minus, and class B, from BB to B. Classes M-3 and M-4 of series 2004-1 and class M-6 of series 2004-2 were placed on Rating Watch Negative. In addition, Fitch affirmed the ratings on seven other classes in the two transactions. The negative rating actions were attributed to a deterioration in the relationship between credit enhancement and loss expectations. The pools consist of conventional 30-year, fixed- and adjustable-rate, first- and second-lien mortgages.