Origination

The crisis in the mortgage industry has made mortgage originators more cautious, resulting in longer loan origination times with tighter underwriting standards and a new survey finds all this affects borrower perceptions. Such scrutiny is having a negative effect on customer satisfaction standards, the J.D. Power and Associates 2009 Primary Mortgage Origination Satisfaction Study found. Overall satisfaction among mortgage customers has declined to 739 on a 1,000-point scale, down 18 index points from 757 in 2008. The average time required to approve and close a loan has increased to nearly 47 days, compared with approximately 30 days in 2008, primarily due to increased scrutiny of loan applications and higher origination volumes driven by increases in refinancing. This increase in turnaround time has a considerable impact on satisfaction, as satisfaction averages only 723 when the time from application to approval takes six or more days, compared with 798 when the process takes less than six days. Similarly, satisfaction drops from 772 to 736 when the time from approval to closing takes 14 or more days. David Lo, director of financial services at J.D. Power, said, "Good underwriting and delivering a satisfying customer experience are not mutually exclusive, and some of the negative effects of a tightened lending environment can be mitigated by simply improving communication between lenders and customers." For example, satisfaction averages 793 among customers whose lender provided and met a time frame for the application/approval process, compared with 632 among those whose lender did not. In addition, satisfaction declines from 781 to 643 when customers were asked to provide the same information more than once. The lender with the highest score was BB&T at 783, followed closely by Wachovia (now part of Wells Fargo) at 781 and then National City Mortgage (just rebranded as PNC Mortgage) and SunTrust tied at 769. Fifth was Wells Fargo at 754. At the other end of the scale is the now-defunct Taylor, Bean & Whitaker at 704, followed by CitiMortgage/Citibank at 711, Chase at 713, U.S. Bank at 715 and Countrywide (now merged into Bank of America and no longer a standalone brand) at 720.

The Department of Housing and Urban Development believes the Federal Housing Administration mortgage insurance program has enough cash reserves to stay in the black during the housing downturn — even though its capital ratio is near zero — but is not ruling out a hike in mortgage insurance premiums charged to consumers. In response to a question from National Mortgage News, HUD secretary Shaun Donovan said the agency is "actively looking at its options" to bolster the FHA reserve fund but is "not ready to make an announcement" regarding mortgage insurance premiums. Lenders fear that a hike in the MIP would raise costs for consumers and slow the housing recovery. A much-anticipated actuarial study on the FHA's "Mutual Mortgage Insurance" fund found that the agency had a 0.53% capital ratio at the end of September to cover a $685 billion book of business. In a two-hour public presentation, HUD secretary Donovan stressed that the MMI has $30.7 billion in cash but it has had to set aside $27.1 billion to cover anticipated losses on FHA-backed mortgages, leaving it with a cash cushion of just $3.6 billion. (The FHA reserve fund is required to have a capital base north of 2%.) The new study believes the MMI will stay in the black unless the housing recession deepens. If that happens, the fund will have a negative capital ratio of 0.46%. But if the mortgage market suffers what FHA calls a "downward interest rate shock" the fund could go negative by as much as 2.33%. But Mr. Donovan and FHA commissioner David Stevens said they do not anticipate that happening.

Commercial and multifamily mortgage loan originations for the third quarter of 2009 were 12% lower than during the second quarter of 2009 and 54% lower than during the same period last year, according to the Mortgage Bankers Association's quarterly survey of commercial/multifamily mortgage bankers originations. The 54% overall decrease in commercial/multifamily lending activity during the third quarter was driven by year-over-year decreases in originations for all property types. When compared to the third quarter of 2008, the total decrease included a 62% drop in loans for retail properties, a 59% decline in loans for health care properties, a 58% reduction in loans for industrial properties, a 56% fall-off in loans for office properties, a 46% drop in hotel property loans and a 40% decline in multifamily property loans. "Every investor group and property type saw year-over-year declines in origination volume," said Jamie Woodwell, MBA's vice president of commercial real estate research. However, third-quarter originations for office properties saw a 65% increase in third quarter from the second quarter. There was also a 49% increase for industrial properties, but a 32% decrease for hotel properties, an 18% decrease for health care properties, a 17% decrease for multifamily properties and a 14% decrease for retail properties.

Six special-purpose property-owning subsidiaries of Los Angeles-based Maguire Properties went into default on their mortgages during the real estate investment trust's third quarter, directly impacting its earnings. The defaults occurred as a result of Maguire's board approving a plan to cease funding cash shortfalls at these properties. The properties are Stadium Towers in Central Orange County, Park Place II in Irvine, 2600 Michelson in Irvine, Pacific Arts Plaza in Costa Mesa, 550 South Hope in downtown Los Angeles and 500 Orange Tower in central Orange County. During the quarter, Maguire accrued default interest totaling $4.6 million as well as regular scheduled interest totaling $7.3 million related to properties currently in default, both of which were unpaid. The net loss for the third quarter of 2009 was $46.8 million, compared to a net loss of $72.5 million for the same period the year prior.

U.S. District Judge Lynn N. Hughes sentenced Clarence Lewis III, a licensed mortgage and real estate broker from Houston, to 15 years in federal prison without parole, followed by three years of supervised release, for running a mortgage fraud scheme. Judge Hughes also ordered Lewis to pay restitution, the amount of which will be determined early next year. According to Tim Johnson, U.S. attorney for the Southern District of Texas, Lewis operated Motown Mortgage Group and Lewis and Associates Realtors and used an assumed name business, Astro Construction, to extract loan proceeds from the real estate closings. The loans on the majority of the properties obtained by fraud fell into default and the properties were foreclosed. Lewis obtained more than $12 million in fraudulent residential mortgage loans during the course of his five-year mortgage fraud scheme beginning in 2002.

U.S. subprime residential mortgage-backed securities from 2004 are seeing notable deterioration in performance while other recent vintages continue to show signs of stabilization, according to Fitch Solutions indices. "As the good quality loans are refinanced, the remaining pools are on average of lower credit quality, a factor that largely caused the drop in price for the 2004 Subprime Price Index," said Fitch Solutions managing director Thomas Aubrey in a report based on the company's credit default swaps of RMBS indices. "Credit quality among the pools will continue to converge over time as better quality borrowers take advantage of refinancing opportunities, thus leaving the pool with more consistent weaker borrowers." The 2004 vintage Subprime RMBS Price Index dropped by 16.7% to 11.57 in the latest month from 13.91 in the previous month, while the Fitch Total Market Subprime RMBS Price Index dropped more marginally to 8.02 from 8.40 and vintages from 2005 through 2007 experienced slight increases during the same time period. While refinancing affected the 2004 vintage, 2005-2007 vintages were less affected because their loan-to-value ratios precluded refis in many cases, according to Fitch Solutions.

Senate Banking Committee chairman Christopher Dodd, D-Conn., has produced a "discussion draft" of a comprehensive regulatory reform bill that requires sellers of mortgage-backed securities to retain 10% of the credit risk. However, the draft provides a risk retention exemption for government-guaranteed mortgages as well as mortgages purchased and securitized by Fannie Mae and Freddie Mac. In addition, regulators can approve a "total or partial" risk retention exemption for other MBS and allocate risk retention between securitizers and the lenders. The House Financial Services Committee is moving toward approving a similar bill to address systemic risk that also requires 10% risk retention, a mandate that the mortgage industry opposes. "To restore confidence in our markets and encourage investment, we will require companies that sell products such as mortgage-backed securities to keep 'skin in the game' so that they won't sell worthless securities to investors," Sen. Dodd said. His bill also creates an independent Consumer Financial Protection Agency to protect consumers from "hidden fees and abusive terms" so they know they are being offered "safe" mortgages and other products, he said. Sen. Dodd said he would seek input on his draft bill and reach out to Republicans in an attempt to mark up and approve a bill by the first week of December. Dodd's CFPA plan focuses on companies that "pose the greatest risk to consumers — mortgage bankers, brokers, finance companies and the largest institutions," according to a legislative summary.

The PMI Group Inc., Walnut Creek, Calif., will still need to raise additional capital, even after it was able to reduce its risk-to-capital ratio from 18.5-to-1 to 16.9-to-1 by contributing all of the common capital shares of its wholly owned subsidiary, PMI Insurance Co., to its primary operating company, PMI Mortgage Insurance Co. There are concerns that not only would PMI breach the 25-to-1 risk-to-capital ratio in place in a number of states, but that it would also breach the 23-to-1 risk-to-capital standard established in its Allstate runoff support agreement, the company said in its most recent 10-Q filing as well as during a conference call. This could occur as early as the fourth quarter of this year. However, analysts at FBR Capital Markets forecast the 23-to-1 level to be breached by the second quarter of 2010. PMI is in the process of readying an existing subsidiary, Commercial Loan Insurance Corp. to start writing business if PMI Mortgage Insurance Co. must cease activities. CLIC is to be renamed PMI Mortgage Assurance Co. PMAC is currently licensed to write insurance in all states except Connecticut, Michigan and New York. The FBR analysts commented, "We expect the risk-to-capital levels to increase from here, unless reinsurance becomes available, outside capital is raised or on the off chance that losses abate." Besides reducing the risk-to-capital ratio, the shift increases the mortgage insurance underwriter's capital by $92.2 million and increases its excess minimum policyholders' position to $307.7 million.

Two former managers in charge of Bear Stearns hedge funds that invested in subprime bonds and derivatives were found not guilty of fraud charges Tuesday afternoon in New York. A jury in Federal District Court in Brooklyn acquitted former Bear executives Ralph Cioffi and Matthew Tannin, believing the two men did not lie to investors by presenting an upbeat picture without disclosing that the two funds they managed were plummeting in value. In particular, Mr. Cioffi was found not guilty of insider trading charges on accusations that he moved $2 million he had invested in one of the failing subprime hedge funds to another less risky fund while telling investors he was adding to his position. The government accused them of defrauding at least 300 investors out of $1.6 billion. The two had been charged with three counts of securities fraud and two counts of wire fraud. They still face civil damages in regard to the hedge funds. Massachusetts sued Bear Stearns Asset Management, accusing Mr. Cioffi of making hundreds of trades on behalf of the hedge fund with the approval of the fund's independent directors. In late 2007 Bear disclosed in an SEC filing that the funds were the subject of a criminal investigation. Bear, which collapsed in early 2008, was a major player in the subprime mortgage market. Previous to its collapse, Bear operated a trading desk and a warehouse unit, and also owned a mortgage banking firm called Encore Credit. (Photos: Bloomberg News)

Editor's note: Today we are rerunning one of our favorite Sue Haviland columns. We hope you enjoy it.One of the best ways to reach out to seniors and educate them about the benefits of reverse mortgages (or any products) is often overlooked even by the most experienced reverse mortgage originators. It is something you can do at practically any time since the means to accomplish this is in front of you every day. It is passing on to your potential clients what's in the news. Using current events and news is an effective way to link (match the message) reverse mortgage benefits to the audience.