Origination

Fannie Mae and Freddie Mac will not become large buyers of mortgage-backed securities this year and will maintain plans to reduce their total asset size, according to a new letter from their regulator. Federal Housing Finance Agency director Ed DeMarco told banking committee leaders on Capitol Hill that the Obama administration wants Fannie and Freddie to concentrate on conserving assets while minimizing credit losses and stressing foreclosure prevention. "This is and will remain the central goal of FHFA and the enterprises," the government-sponsored enterprise regulator says in the letter. FHFA acting director DeMarco also notes in the letter that the GSEs have the flexibility to expand the size of their investment portfolios but notes that such moves will center around purchases of delinquent mortgages out of guaranteed MBS for modification and loss mitigation. The Federal Reserve is expected to end its purchases of GSE MBS at the end of this quarter. Many market observers assumed Fannie and Freddie would step in to fill the void — if necessary — to keep mortgage rates stable. "I expect that other private parties will begin to invest in Enterprise MBS as the Federal Reserve gradually withdraws its purchase activity," Mr. DeMarco says.

For the next few weeks, Broker Universe will feature some of our favorite Sue Haviland columns from the past year.As we look forward to 2010, we continue to see stories of companies closing their doors or scaling back their operations. Have you taken decisive steps to be sure that in 2010 your reverse mortgage business will continue and you'll be able to serve the seniors in your community? You've heard it said, "hope is not a strategy" Are you sitting around just hoping that things will be OK in 2010? Or have you taken stock of your business and put a plan in place that reflects your goals and current conditions?

The potential for higher-than-expected commercial real estate investment losses is one of the reasons Fitch Ratings, Chicago, has downgraded the issuer default rating for MetLife Inc., New York, from "A+" down to "A". MetLife has an above-average investment exposure to CRE. These investments make up 16% of the company's total invested assets as of Sept. 30, 2009, and consist of commercial mortgage loans, commercial mortgage-backed securities and real estate. Fitch added that a mitigating factor to the downgrade is MetLife's commercial mortgage reserve of $542 million as of Sept. 30, 2009. The rating agency said it is also concerned about MetLife's potential for future investment losses from prime and alt-A residential mortgage-backed securities and hybrid securities. Fitch projects MetLife has a potential for further investment gross losses of between $2.2 billion and $2.6 billion for the period covering the fourth quarter of 2009 and all of 2010. On the positive side, MetLife has a below average exposure to subprime mortgage investments, as the company was very proactive in identifying issues and took steps to reduce its exposure, the rating agency said.

The Department of Housing and Urban Development is projecting that new, higher fees charged by the Federal Housing Administration along with earnings from the Government National Mortgage Association program will double the agency's mortgage-related "receipts" in the new fiscal year to $6.9 billion. HUD secretary Shaun Donovan said he plans to use some of the additional $3.4 billion in FHA/GNMA revenue to expand such social programs as Section 8 rental vouchers. During a press conference with reporters Mr. Donovan provided little detail on replenishing the depleted FHA insurance fund, but seemed confident that it would stay in the black thanks to new premium hikes charged to borrowers. HUD has set its overall FY 2011 budget at $48.5 billion, a 5% reduction from last year. The Section 8 plan and HUD budget, if approved by Congress, will create 35,000 additional renters by giving them federal housing vouchers. In terms of dollars for vouchers, the increase is 8% to $19.6 billion. Secretary Donovan, in response to a question, said government money will not be used to bail out apartment projects such as the $5.6 billion Stuyvesant Town leveraged buyout which occurred in 2006. The housing secretary noted that "private investors are rightly" suffering what he called "private losses."

Wells Fargo & Co. saw a $28.2 billion reduction in unpaid principal balances on legacy 'Pick-a-Pay' mortgages last year, according to an investor conference presentation by the company's chief financial officer. However, there was little detail on how the company achieved its results. At press time, a Wells spokesman had not returned a telephone call about the matter. A recent Wall Street Journal report indicates that Wells has been lowering payments for some underwater borrowers who originally took out Pick-a-Pay loans by offering them extended-term mortgages with interest-only payments. The company also reduced its legacy credit-impaired commercial real estate portfolio by $5.6 billion year-to-year, said CFO Howard Atkins in a web cast presentation from New York. Wells inherited both the CRE portfolio and the negative amortization 'Pick-a-Pay' ARMs when it bought Wachovia in the fall of 2008. Mr. Atkins said that despite these negatives, the Wachovia purchase was beneficial. Wells improved its distribution network and diversified its financial offerings. The deal also allowed it to bolster its origination and servicing volumes. Addressing questions about the company's home equity exposure, Mr. Atkins said performance in that area is relatively good given that it includes some first-lien product and has strong underwriting outside of the third-party sector it exited a couple of years ago. When asked about HAMP modifications' effect on second lien home-equity product, he said he would not take a position other than to note the company is exploring its options. Wells has completed more than 118,000 modifications through the government's Home Affordable Modification Program.

Vulture fund PennyMac Mortgage Investment Trust lost $1.15 million in the fourth quarter, its second consecutive loss since going public last year. The company continues to evaluate loan portfolios and MBS for possible purchase, but also is moving full steam ahead with plans to launch a conduit that will allow it to purchase newly originated loans from small mortgage bankers. Once it accumulates enough product it will issue MBS. Company founder and CEO Stanford Kurland said "at this early stage" losses at the company are not surprising. "Over the past several months, our manager has focused significant attention on its ability to adapt and react to changing dynamics in the mortgage marketplace, including a low volume of available performing mortgage transactions, which offer greater opportunity for value enhancement, and less attractive trading levels for the pools that have been marketed." At yearend, PennyMac reported assets of $324 million and total revenues of just $1.5 million. It took in $1.6 million of interest income on its investments, but had to mark down the value of its holdings by $115,000.

Flagstar Bancorp, one of the nation's top ranked wholesaler funders, reported a fourth quarter loss of $71.6 million, an improved showing over the prior quarter and the same period last year. Meanwhile, the Michigan-based lender originated $6.9 billion of home mortgages in the fourth quarter, a 28% increase in fundings from Q4 2008. For the full year, originations rose 15% to $32.4 billion. Even though its quarterly earnings improved, it lost $514 million for the full year, compared to a $275 million loss the prior year. At yearend Flagstar serviced $56.5 billion in loans. (It is currently shopping around a $10 billion package of receivables.) At year end it held $659 million of non-performing residential mortgage loans, a 51% increase from 2008. It also owns $338 in nonperforming commercial mortgages, a 67% spike from 2008.

The Comptroller of the Currency believes that in light of newly proposed accounting rules regarding "sale treatment," the congressional push to impose risk retention or "skin in the game" requirements on MBS issuers will only hamper a recovery in the private label market. Speaking at a American Securities Forum conference, OCC chief John Dugan called risk retention an "imprecise and indirect" way to improve the underwriting quality of residential mortgages. As an alternative, he thinks federal regulators should set minimum mortgage underwriting standards including requirements for verification of income, and minimum downpayments. These minimum standards would insure that newly funded mortgages are financially sound, likely to be repaid, allaying fears that an asset bubble is being created. Mr. Dugan thinks these attributes will attract investors to the securitization process. He supports risk retention but new accounting proposals prevent securitizers from achieving sale treatment on mortgage backed securities if they retain 5% of that risk. The language is part of a House-passed bill and appears in a recent proposal issued by the Federal Deposit Insurance Corp. "I do think...that minimum underwriting should be strongly considered as an alternative to rigid 'skin in the game' requirements," Mr. Dugan told conference attendees.

CitiMortgage, which early last year trimmed its wholesale unit to the bone, is now contacting certain loan brokers it used in hopes of drumming up new business. It's unclear how extensive the lender's broker outreach effort is at this point. A company spokesman noted that CitiMortgage has no "formal" plans but said, "We touch base with some former customers from time to time to consider the potential benefits of future relationships." Brian Benjamin, who runs Two River Mortgage in Red Bank, N.J., said he was contacted by a CitiMortgage account executive from Texas and asked to re-register with the lender. Mr. Benjamin said he sent in his application but has not heard from Citi. A Denver broker, requesting his name not be used, said he too was contacted but is leaning toward not re-applying. (For the full story see the paper edition of National Mortgage News.)

Here are some thoughts on turning around a trend of declining income.