Origination

Former executives and regulators, testifying Thursday before the Financial Crisis Inquiry Commission, all tried to shift blame for the giant company's problems. Charles Prince, Citigroup's former chief executive, pointed a finger at the credit rating agencies and overly complex products-like collateralized debt obligations-that no one understood. (Mr. Prince was onboard when Citi made several disastrous investments in subprime lenders, including its acquisition of assets from Ameriquest and Argent.) Robert Rubin, a former Treasury secretary and former chairman of Citi's executive committee, laid the blame on a confluence of market events while saying he was out of the loop for most of the company's decisions. The bank's regulators, meanwhile-John Dugan, the comptroller of the currency, and his predecessor, John D. Hawke-criticized the institution, its managers, other regulators and the market in general. If there was an underlying consensus, it was this: the financial crisis was either entirely unforeseeable or should have been spotted first by somebody else.

New research on the Cook County multifamily housing market by DePaul University's Institute for Housing Studies says significant price declines have occurred during the past three years, accompanied by a sharp increase in foreclosures, especially last year. The study looked at Chicago and 76 surrounding communities. The research found that the multifamily financing market has been virtually abandoned by all but two financial institutions: Fannie Mae and Freddie Mac. The authors note that policy makers in Washington should keep this thought in mind as they "contemplate short- and long-term" changes to the GSEs. The study was written by James Shilling, the Michael J. Horne chair of Real Estate Studies at DePaul. IHS researchers analyzed Cook County Recorder of Deeds property data for repeat sales for 25,822 small (two-to-six unit) and 591 large (seven-plus unit) rental buildings in Cook County from 1998 to 2009.

Credit default swap indices compiled by Fitch Solutions show subprime residential mortgage-backed securities prices have continued to strengthen with some variation by vintage. Month-over-month, subprime RMBS overall were up 7% as of April 1. The 2006 vintage, which was up 15%, reached a high not seen since December 2008 in the most recent month. The 2004 vintage was up 9% and the 2005 vintage was up 6%. The relatively weak 2007 vintage, which managed to gain 4% during the market, was still at its third-lowest-ever value. Fitch Solutions' loan-level analysis shows the constant default rate for all vintages dropped during the period. In addition, the constant prepayment rate fell across the board. "While refinancing remains challenging for subprime assets, the general drop in default rates is an encouraging sign," said Fitch Solutions managing director Thomas Aubrey.

During the height of the mortgage boom, a thriving private-label MBS market "threatened" Fannie Mae financially, driving the congressionally chartered mortgage giant into the alt-A market which ultimately led to huge credit losses at the company, a former top Fannie official told a congressional panel Friday. The growth of the private-label securities market threatened Fannie "financially" along with its "relevance" to its seller/servicers, said former Fannie executive Robert Levin in testimony before the Financial Crisis Inquiry Commission. Speaking before the same panel, former Fannie Mae CEO Daniel Mudd testified that the GSE gradually entered the alt-A market and understood the risks. Fannie's alt-A loans performed better "by a factor of two" than alt-A loans generated by the Wall Street conduits, Mudd said. But FDIC chairman Phil Angelides noted that alt-A, subprime and other high-risk loans caused 69% of Fannie's credit losses in 2009, even though they comprised only 24% of total loans. He also noted the GSE was highly leveraged. (At one point, Fannie's alt-A holdings totaled $350 billion.) Mudd said the bulk of Fannie's alt-A loans were bought during the peak of the housing boom and their performance suffered as a result of declining house prices and the nation's economic downturn. In September 2008 the Federal Housing Finance Agency seized control of Fannie, placing it into conservatorship. Upon the GSE's seizure, Mudd was fired. In his opening remarks to the commission, Mudd said the GSE's business model and structure could not "withstand a multiyear 30% home price decline on a national scale, even without the accompanying global financial turmoil."

The Department of Housing and Urban Development is raising the net-worth requirement for FHA-approved lenders-but by not as much as expected. HUD had originally proposed raising the $250,000 net-worth requirement to $2.5 million within three years. A final rule, expected to be released shortly, raises it to $1 million starting next year-but there are breaks for firms that are considered "small business" lenders. "Current FHA-approved small business lenders must possess a minimum net worth requirement of $500,000," HUD said. This means an independent mortgage-banking firm with less than $7 million in total annual receipts will qualify as an FHA small business lender. One source said an FHA lender that funds roughly $250 million in loans annually should qualify for the lower $500,000 net-worth requirement. Depository institutions with less than $175 million in assets also can qualify as an FHA-approved small business lender. The final rule also eliminates FHA's approval process for mortgage brokers.

Several medium-sized nonbanks are exploring the possibility of buying depository institutions using cash from stellar residential profits enjoyed over the past 18 months, according to investment banking officials. In interviews with National Mortgage News this week, three active mortgage advisors noted that "the play" for these nonbank acquirors is to solidify warehouse financing. "Even though the warehouse situation has improved in recent months it's still not great," noted one New York-based advisor. "The idea here is to self-fund." These investment bankers did not want to be identified because they are currently working on transactions that haven't closed. One noted that a Midwestern-based wholesaler he's been working with earned $29 million on originations of $1.6 billion last year. He called such a profit performance "unheard of." One risk for nonbank buyers is dealing with delinquent commercial real estate loans of troubled banks. Another challenge is gaining approval from the Federal Deposit Insurance Corp. "In the end will the government accept their business plan?" asked one investment banker.

A marketplace for illiquid asset-backed securities will include manufactured housing ABS, the company that operates the exchange said. SecondMarket, which already has platforms to trade residential and commercial mortgage-backed securities, has created the ABS platform based on the "significant interest" from its buyer and seller bases. "Over the past several months, we have seen significant buy- and sell-side interest from our market participants in a variety of securities across multiple sectors," said Elton Wells, head of structured products at SecondMarket. "The increased demand and completion of numerous ABS deals prompted us to officially launch this new market."

Generation Mortgage Co., Atlanta, has introduced a new fixed-rate Home Equity Conversion Mortgage product with no origination fee and no servicing fee to provide senior clients more upfront loan proceeds at a lower cost. This Federal Housing Administration-insured reverse mortgage product is available through the company's retail and wholesale production channels. It allows qualified borrowers to receive additional, upfront loan proceeds of up to $10,000 or more, depending on the equity in their home. "We are in the business of helping clients put as much money as possible back into their pockets, and the best way to do that is by regularly evaluating how we can maximize each client's reverse mortgage," said Scott Peters, president and chief executive of Generation Mortgage. "This attractive option is a function of positive market conditions. It makes sense for seniors to investigate this option now as these conditions can change at any time."

A new coalition of commercial real estate interests is urging the government and Congress to act quickly to revive CRE lending and help speed up the economic recovery. In a "Roadmap to Recovery," the Commercial Real Estate Coalition outlines 51 recommendations to revive the CRE sector and refinance $1.3 trillion in CRE mortgages that mature by the end of 2013. Right now, "the capital necessary to refinance those loans remains largely unavailable," said Steve Bartlett, president and chief executive of the Financial Services Roundtable. The coalition is calling for special tax breaks to boost investment in CRE mortgage and easing accounting, capital and appraisal standards to facilitate refinancings. One of the major goals of the coalition is to restart the commercial mortgage-backed securities market. The roadmap points out that Financial Accounting Standards 166/167 combined with risk retention proposals and recent risk-based capital changes "can virtually halt the securitization credit markets and restrict overall credit availability." The coalition also points out that banks hold $1.5 billion in CRE loans and property values have dropped by as much as 40% in some areas. Meanwhile, CRE lending and securitizations have plummeted to extremely low levels. "The liquidity crisis will be exacerbated by those small and community banks that will be hard hit by CRE losses," the roadmap says.

Home prices could decline on a nationwide basis this year, with a "prolonged" recovery starting next year although some locales could see a quick revival, according to the chief economist of Fiserv. "Nationally, Fiserv Case-Shiller data points to a further 7% decline in home prices through the end of this year, with a prolonged recovery beginning early in 2011. In many markets, the emphasis is on the word 'prolonged,'" said chief economist David Stiff. Some markets, such as Pittsburgh, Columbia, S.C., and certain metropolitan areas in Texas, Washington state and upstate New York are poised for a relatively fast recovery. But in areas such as California, Florida, Arizona and Nevada, it may take 15 or more years for home prices to climb back to their peak as several powerful forces in the market will severely hinder housing recoveries, Mr. Stiff said.