Origination

Commercial real estate sales, prices and lending showed improvement in the first quarter but regulators expect bank losses on CRE loans will be elevated for at least another year. Deputy comptroller Bert Otto told a congressional panel that vacancy rates are still rising nationally and cash flows on CRE properties are expected to decline into 2011. "We expect CRE losses to remain elevated for an extended period, much as we saw in the early 1990s downturn," the national bank supervisor testified. Losses on CRE loans are the major driver of small bank failures. But Otto noted there has been some improvement in the market. A private index shows a stabilization of CRE prices as of February and property sales jumped 16% in the first quarter, compared to a year ago.

Mortgage industry officials continue to lobby for language in the regulatory reform bill that will ease the burden of the Home Valuation Code of Conduct regulation. According to Marc Savitt, president of the National Association of Independent Housing Professionals, an amendment will be introduced during conference talks that will allow any licensed originator to order an appraisal. Currently, HVCC bans mortgage brokers and retail loan officers from being involved in the appraisal process. Mr. Savitt said a HVCC amendment was introduced in the Senate this week but not voted on.

The Federal Housing Finance Agency said Thursday that Fannie Mae and Freddie Mac are preparing to field complaints from appraisers, consumers and others about violations of the Home Valuation Code of Conduct. If, for example, a lender pressures an appraiser to overvalue a home so a loan can get done, the appraiser will be able to report the lender to one of the GSEs, which may refer the case to regulators. Originally that job was going to belong to an "independent valuation protection institute" that the GSEs would seed with a combined $24 million. But since the March 2008 agreement with New York attorney general Andrew Cuomo that established the code, the government has seized Fannie and Freddie and sunk $145 billion of taxpayer money into them. It has become untenable for the GSEs to bankroll an independent institute. "I cannot, as conservator, justify the enterprises funding the institute," said Edward DeMarco, the acting director of the FHFA in a letter to Cuomo. In the next few weeks the GSEs will create a process for people to submit complaints online.

Metropolitan Equity Partners, New York, has pulled out of a deal to buy a mortgage brokerage firm because of concerns over declining loan volumes and worries about mortgage buybacks. MEP managing director Frank Gallagi said he still likes the mortgage industry and would like to make an investment but not at this time. He declined to identify the company or talk about the deal further. He stressed that the lender he was targeting will survive and is not in danger of failing. In an e-mail to National Mortgage News, he said, "I'm still very interested in deploying funds into this sector and am continually looking for opportunities." MEP planned to convert the brokerage firm into a mortgage banker.

The Senate late Thursday passed a landmark financial regulatory reform bill that will increase regulation and oversight of the residential mortgage industry and overhaul the way Wall Street conducts business. The legislation, the most sweeping since the Great Depression, requires issuers of mortgage-backed securities to pool the safest "qualified" mortgages (as determined by regulators) to escape a 5% risk retention requirement. The bill, crafted by Sen. Chris Dodd, D-Conn., creates a new consumer protection agency with rulemaking and enforcement authority to stop abusive mortgage lending practices. However, the legislation, for now, punts on the issue of reforming Fannie Mae and Freddie Mac. "For the first time ever, we will have a Consumer Financial Protection Bureau to watch out for the average citizen in our country when they are abused by the financial marketplace that takes advantage of them on home mortgages and credit cards," Dodd said. The legislation directs federal regulators to establish minimum standards for verifying a borrower's ability to repay a loan and places certain restrictions on loan officer and mortgage broker compensation. The bill (S. 3217) also instructs the Securities and Exchange Commission to create a regulatory body that selects the credit rating agency for initial ratings on MBS. The Senate passed the Dodd bill by a 59-39 vote around 8:30 Thursday evening. The House of Representatives passed similar reform legislation in December but many differences remain between the two bills. House and Senate banking committee leaders will meet in conference to iron out final legislation. The talks are expected to take several weeks and will not be completed until the end of June.

Lenders are tightening underwriting standards on Veterans Administration-guaranteed mortgages even though the VA delinquency rate is lower than on prime loans. "VA has received anecdotal evidence and reports from industry partners that stricter requirements are being imposed on their VA loans," an agency official told members of the House Committee on Veterans Affairs. VA associate deputy secretary Thomas Pamperin said many lenders are using credit scores to qualify veterans, which is not required by the agency. Also, some lenders are considering a downpayment requirement. The VA program is designed to provide no-downpayment loans to veterans. "VA does not have the authority to prohibit lenders from imposing this extra layer of requirements, but additional lender requirements may make it more difficult for veterans to obtain homes," Pamperin testified. The latest Mortgage Bankers Association delinquency report shows that 5.29% of VA single-family mortgages are 90 days or more past due and in foreclosure, compared to 7.08% for prime mortgages. Meanwhile, VA loan production is on track to match fiscal year 2009 when lenders originated $68 billion in such loans. As of April 30 (the first seven months of FY 2010), lenders had originated $36 billion in VA-backed mortgages.

Members of the Federal Reserve's monetary policy committee are concerned the recovery in the housing market has "stalled," according to minutes of its April 28 meeting. Federal Open Market Committee members noted that home prices have stabilized in many parts of the U.S. and in some areas are rising. However, certain members see "elevated foreclosures as posing a downside risk to home prices," according to the transcript. The FOMC minutes reveal that members discussed the Fed's $1.25 trillion MBS purchase program which ended, as planned, on March 31. The discussion centered on when the central bank should begin the sale of MBS as well as the pace of those sales. There was a wide range of views and no decisions were made concerning a strategy. For now, the Fed will continue to allow its MBS portfolio to run off.

Nine mortgage industry groups along with the U.S. Chamber of Commerce are urging the Department of Labor to reconsider and withdraw its recent ruling that requires residential lenders to pay overtime to certain loan officers. "The interpretation constitutes a sharp break from existing law that will result in both very considerable costs to, and adverse effects on, employers and employees alike," the industry groups say in a letter to DOL's director of Wage and Hour Division. On March 24, DOL issued an interpretation that requires lenders to pay overtime to retail loan officers that work in an office. There are currently 110,000 retail mortgage loan officers and they are "well compensated by commissions and frequently work irregular hours," the May 19 letter states. The trade groups contend DOL made the new interpretation without notice and it represents a "sharp break" with the department's 2004 interpretation. "The interpretation should be withdrawn and the department should embark on a new rulemaking with notice and comment if it wishes to change policy or implement new requirements in this area," the joint letter says.

Commercial banks originated $122 billion of single-family loans through retail means in the first quarter, a 17% decline from the previous period. It marks the third quarterly decline since the second quarter of 2009 when originations by banks topped $222 billion during the refinancing boom. New call report figures released by the Federal Deposit Insurance Corp. show that 762 commercial banks and savings banks were active residential lenders in the first quarter, down from 869 in the fourth quarter. Banks are required to report origination data to FDIC only if they have assets of $1 billion or greater or they originated more than $10 million in one-to-four family loans in the past two quarters. The FDIC also reported a decline in wholesale lending activity. FDIC banks purchased $200 billion of residential loans during the quarter, down 19% from the previous quarter and nearly unchanged from a year ago. Banks also sold $359 billion of residential first mortgages.

Banks and thrifts posted their best earnings in two years during the first quarter due to an improvement in mortgage buybacks and lower loan losses, according to new figures compiled by the Federal Deposit Insurance Corp. A key contributor to the bottom line was a steep, 50% drop in mortgage buybacks from the first to the fourth quarter. Overall, banks and thrifts repurchased $9.3 billion of home mortgages, after being slapped with claims from secondary market investors including Fannie Mae and Freddie Mac. Net charge-offs on residential and construction loans both declined in the first quarter, a sign that charge-offs may be peaking. Overall, the industry earned $18 billion. FDIC-insured institutions charged off $13.5 billion of one-to-four family loans, down 13% from fourth quarter. However, the serious delinquency rate rose to 7.98%, up 57 basis points from the previous quarter. Part of the rise may be due to banks shrinking their holdings of residential mortgage loans and loan modification efforts. On construction loans, the percentage of loans 90 days or more past due fell to 22.8% in the first quarter, down nearly 300 bps. But net charge-offs totaled $1.7 billion down from $2.5 billion in the previous quarter.