Origination

Prosecutors in Vermont have secured the fifth conviction in a scheme that cost mortgage lenders over $11 million. Benjamin Osmanson of California and Sarita, Texas, pleaded guilty to charges related to his scheme to defraud mortgage lenders by submitting false loan applications in the names of "investors." According to the U.S. attorney's office for the District of Vermont, from at least as early as January 2006 through at least April 2007, he and co-defendant Jillian Protzman orchestrated the purchase of at least 50 properties in California, Florida, Kentucky and Vermont in the names of at least 10 investors, obtaining more than $26 million in loans to support the purchases. Osmanson recruited friends, family members and acquaintances to "invest" in real estate. He and Protzman then allegedly submitted fraudulent loan applications in the names of the investors to obtain loans. Osmanson, Protzman and others sought loans from multiple lenders and were said to have closed the loans for each investor within a short period of time in order to preserve the appearance of the investor's good credit until the transactions were complete. The defendants enriched themselves with commissions connected to the fraudulent property purchases and continued to recruit investors and submit applications for new loans, the investigation showed. During the plea hearing, Osmanson admitted his scheme caused more than $11 million in losses to the mortgage lenders as the properties went into foreclosure. Protzman pleaded guilty in August. Two mortgage brokers involved in the scheme, Mike Otis and Chris Whitfield, pleaded guilty earlier this year in the Western District of Kentucky. Florida realtor Margaret Giresi recently pleaded guilty in Vermont for her role in the scheme. Sentencing for Osmanson has not yet been scheduled.

Zacks Equity Research, Chicago, has made Zions Bancorp., Salt Lake City, the Bear of the Day for Sept. 16. Among Zacks' concerns is Zions' commercial real estate exposure. "CRE represents over one-third of Zions overall loan portfolio. Continued weakness in the residential development and construction activity in the southwest has resulted in further deterioration of credit metrics in the past several quarters. Given the sluggish economic conditions, we expect credit to further deteriorate across the industry in the coming quarters."

Residential Credit Solutions is the winner of the first FDIC Legacy Loan sale involving $1.3 billion in residential mortgages from the failed Franklin Bank in Houston. RCS, a residential mortgage investor and servicer based in Fort Worth, Texas, bid $64.2 million in cash to purchase a 50% equity stake in a limited liability company that will own the troubled assets. The Federal Deposit Insurance Corp. said the pilot sale was "very competitive" and it expects to recover 70% of the outstanding balance on the nonperforming loans. "The bid received from RCS for the financed sale of assets to the LLC using 6-1 leverage was determined to be the offer that would result in the greatest return to the [Franklin] receivership of all competing bids," FDIC said. RCS will manage the LLC portfolio and service the loans under the Home Affordable Modification Program. The company could not be reached for comment.

Barclays PLC, London, is shifting $12.3 billion in problem assets from the recent U.S. mortgage/financial crisis into a new third-party vehicle in a deal it will fund over 10 years through a $12.6 billion loan to the third party involved. The assets are being sold to Protium Finance LP, a newly established fund designed to purchase credit market assets from third parties and manage them over time. Protium's partners are providing $450 million of funding for its activities. The Barclays loan will be used primarily to fund Protium's purchase of the assets from Barclays. Protium is run by C12 Capital Management, an independent asset management firm run by Stephen King, who previously was head of Barclays Capital's principal mortgage trading group, and Michael Keeley, who previously was a member of Barclays Capital's management committee covering European financial institution. Neither will be tied to Barclays. The assets will stay on Barclays' balance sheet for regulatory purposes and it will continue to hold capital against them. Barclays said the deal is aimed at restructuring exposure to the risk in the assets in such a way that it mitigates the potential impact of short-term movements in market values and monoline downgrades.

Non-bank mortgage lenders hit the ball out of the park in the first quarter of this year, reaping an average profit of $1,088 on each loan funded — a six-fold increase in profitability over the fourth quarter of 2008. A new report issued by the Mortgage Bankers Association shows that higher loan production and refinancing activity produced a remarkable turnaround for the 319 mortgage companies that responded to its survey. "It was a needed boost for the mortgage industry," said Marina Walsh, MBA associate vice president of industry analysis. Average loan production per company jumped to $214 million in first quarter, compared to $126 million in fourth quarter, as refinancings made up 66% of production. In addition, operating expenses on a per loan basis dropped due to the higher loan volume. The "net cost to originate" fell to $1,725 per loan in the first quarter, down from $2,324 in the fourth quarter.

The Internal Revenue Service and Treasury Department have issued new regulations related to certain modifications of commercial mortgages held by real estate mortgage investment conduits. The new regulations, which were not expanded to include mods of commercial mortgages held by investment trusts as some in the industry have proposed, would allow lenders to modify commercial real estate loans held by REMICs in some cases without incurring tax penalties. The IRS and Treasury Department said they would continue to consider whether the new regulations should also be expanded to investment trusts. The Real Estate Roundtable has been a proponent of the REMIC change.

The downgrade of the insurer financial strength and issuer default ratings of Fidelity National Financial Inc., Jacksonville, Fla., by Fitch Ratings, Chicago, means the rating agency has downgraded three of the four remaining national title underwriting groups in the past week. Fitch cut FNF's IDR by two notches, from "BB" down to "B+". The two-notch downgrade, the Fitch report said, reflects not only the IFS cut on FNF's title insurance subsidiaries, but the greater weight given the substantial amount of goodwill at the holding company level. FNF has a debt-to-tangible capital ratio of 44% as of June 30, which Fitch categorized as outside its expectations. A positive is that FNF reduced financial leverage by paying down debt after an equity offering in April 2009. The IFS downgrade affects all FNF title subsidiaries except the former LandAmerica operations. The rating was dropped to BBB- from BBB. Fitch feels FNF has an aggressive capital management strategy, resulting in a higher operating leverage at the underwriting units than its competition. Despite this, Fitch retains an investment grade IFS rating on FNF in recognition that its historical results through the first half of this year have been better than its competition's. Another positive is that FNF now has a 46% market share, thanks to the LandAmerica acquisition.

In order for Radian Group to continue writing new mortgage insurance policies in 2010 and beyond, the company is considering a number of alternatives, including reactivating a subsidiary, said chief executive S.A. Ibrahim. Speaking at the Barclays Capital Global Financial Services Conference, he said the company is exploring the use of its Amerin Guaranty subsidiary to write new business in the 14 states that have risk-to-capital limits if necessary. The company supports industry efforts for regulatory or statutory relief by reducing the 25-to-1 risk requirement in those states. Among the states where such action has recently occurred is Arizona. Radian is also evaluating its reinsurance relationships in order to reduce its risk-to-capital ratio. As of June 30, Radian was in compliance with a risk-to-capital ratio of 15.9-to-1. But, Mr. Ibrahim said, this ratio is sensitive to future defaults, so it has the two initiatives underway. Depending on regulatory approval, one or both can be in place. When asked by an attendee why loans are less likely to cure in this downturn than in the past, Mr. Ibrahim said his opinion was that the decline in home values removed the opportunity for a borrower in trouble to have the ability to sell the property and get out of trouble.

The upward climb of the Mortgage Bankers Association's Market Composite Index came to a halt the week ended Sept. 11, which was a shortened time period because of the Labor Day holiday. The MCI, calculated from the MBA's Weekly Mortgage Applications Survey, decreased 8.6% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 18.3% compared with the previous week and decreased 18.7% compared with the same week one year earlier. MBA stopped disclosing index values with the July 31 data release. The Refinance Index decreased 7.4% from the previous week and the seasonally adjusted Purchase Index decreased 10.3% from one week earlier. Even though the Refinance Index declined, the share of refinancing applications increased to 61.0% of total applications, up from 59.8% the previous week. The share of adjustable-rate mortgage applications for the week was 6%, up from 5.8% one week prior. The average contract interest rate for 30-year fixed-rate mortgages increased to 5.08% from 5.02%, with points declining to 0.98 from 1.23 (including the origination fee) for loans with an 80% percent loan-to-value ratio, the association reported. However, the other two rates tracked by the MBA survey went in the opposite direction as the average contract interest rate for 15-year FRMs decreased by 4 basis points to 4.41%, while for one-year adjustable rate loans, it decreased by 8 BP to 6.61%. The MBA can be found online at http://www.mortgagebankers.org.

Fannie Mae has named former PHH Mortgage chief Terry Edwards — who steered that nonbank through the worst of the mortgage crisis — as its new EVP in charge of portfolio management. At Fannie he will focus on the GSE's foreclosure prevention and loss mitigation activities for its single-family book of business. Until a few months ago Mr. Edwards was PHH's CEO but when a new control group — led by former Freddie Mac CEO Greg Parseghian — took charge of PHH he found himself serving only as a consultant. (PHH is a top ten ranked lender/servicer.) Even though subprime and alt-A lending boomed from 2003 to 2008 PHH stood mostly on the sidelines, concentrating on GSE and FHA lending. PHH is the nation's largest private label funder/servicer.