Origination

The First Magnus Litigation Trust and StoneWater Mortgage have entered into a settlement that will dismiss with prejudice claims against the mortgage company, its related companies, current officers, directors and employees. Under the terms of the agreement, both sides admitted no fault. No other terms were disclosed. The lead counsel for the First Magnus Litigation Trust, Jamie R. Welton, said in a statement "the settlement reached with StoneWater is a good result for the creditors and increases the assets from which they may be paid." Among those who are involved in the settlement is current StoneWater president Doug Lemke. However former First Magnus and/or StoneWater executives Gurpreet S. Jaggi, Thomas W. Sullivan Sr., Thomas W. Sullivan Jr., Clinton W. Gaylord, Gary K. Malis, Dominick Marchetti and Karl F.W. Young are still active defendants in the lawsuit. The suit alleges the seven men stripped $300 million from First Magnus, prior to its filing for bankruptcy, to start StoneWater, which they deny.

For the first time since July 2007, there was an increase in the median sales price for Southern California home sales, according to MDA DataQuick, San Diego. The median sales price for May was $249,000, up 0.8% from $247,000 in April but down 32.7% from $370,000 a year ago. Furthermore, for the 11th consecutive month, there was an increase in home sales in the region as a total of 20,775 new and resale houses and condos closed escrow in San Diego, Orange, Los Angeles, Ventura, Riverside and San Bernardino counties in May. That was up 1.3% from 20,514 in April and up 22.8% from 16,917 a year ago. May's sales were the highest for that month since May 2006, when 30,303 homes sold. Foreclosure resales - homes sold in May that had been foreclosed on in the prior 12 months - accounted for 50.2% of resales. That was down from 53.5% in April and from a peak of 56.7% in February. "We appear to be in the early stages of the market gradually tilting back toward a more normal balance of sales across the home price spectrum. As more sellers get realistic, more buyers get off the fence and more lenders offer reasonable terms for high-end purchase financing, we'll see a more normal share of sales in the more established, higher-cost areas that have been nearly comatose," said John Walsh, MDA DataQuick president. "Let's not forget we're into the traditional homebuying season right now, meaning more people are purchasing for all of the normal reasons, such as a new job or to get settled before school starts. Many are concerned with finding the right home in the right area, not just the most deeply discounted home."

Homeowners and mortgage investors would not be the only ones with "skin in the game" if U.S. Housing Secretary Shaun Donovan's plan for revising the nation's consumer protection laws comes to pass. The secretary of the Department of Housing and Urban Development told the NAREE conference that "fairness" would be a "fundamental principle" that the Consumer Financial Protection Agency proposed by the Obama Administration would follow. Under that heading, he said, mortgage brokers would "owe a duty of best execution" to avoid conflicts of interest between themselves and their borrower clients. In addition, yield spread premiums would be "banned outright" and prepayment penalties would be restricted. And to reward responsible lending, loan originators would be required to retain a vested interest in the mortgages they write. Brokers would be paid "over time" based on the continued performance of the loans they originate rather than at the closing table. At the same time, lenders and mortgage aggregators would be compelled to retain a 5% interest in the loans so they would be rewarded for making good loans and penalized for making bad ones. The HUD secretary said neither he nor President Obama had any desire to prescribe exactly how brokers should be paid. But they "have to have a duty" to provide affordable products. "Putting a borrower in a mortgage (the broker) knew from day one that the borrower could not afford cannot be allowed to continue," he told the conference. "There has to be a chain there to tie some responsibility to the mortgage to ensure that this kind of situation doesn't ever happen again." None of what secretary Donovan proposed is new, but it is the first time the proposals have been adopted by a key government official.

The Obama Administration expects Fannie Mae and Freddie Mac to continue playing a key role in housing finance, the government sponsored enterprises' regulator said. While exactly what structure the GSEs will eventually take is still very much up in the air, James Lockhart, director of the recently minted Federal Housing Finance Agency, said they will be reconstituted with a well-defined mission that does not involve excessive risk taking. That's likely to mean the two companies, which are now in conservatorship and under FHFA's wing, will no longer be required to meet affordable housing goals that were prescribed by their old mission regulator, the Department of Housing and Urban Development. "In retrospect," Mr. Lockhart told attendees at the National Association of Real Estate Editors' annual real estate journalism conference in Washington that the goals "caused (Fannie Mae and Freddie Mac) to do things they shouldn't have done." The federal regulator also said the GSEs should operate under "clear demarcation" of their roles in relation to the private sector, and that any risk they undertake should be explicit, at actuarial cost and in conjunction with sound insurance principles. "Clearly," he said, "it was folly to allow the enterprises to legally leverage their mortgage credit by well over 100 to 1."

Arvest Mortgage Co., Lowell, Ark., has originated $1 billion in mortgages for the seventh consecutive year. But this year, instead of reaching that mark in mid-to-late December, it accomplished this goal in the first six months of 2009. This also means the company has now surpassed its total volume for 2008. Refinancings accounted for 75% of the six-month total, but in the last few months, there has been a shift in applications to 60%/40% in favor of purchases. Helping the shift from refis to new mortgage loan applications, explained Arvest Mortgage senior vice president Todd White, is that the first-time homebuyer tax credit is stimulating consumer interested.

A majority of respondents to the first-ever mid-year version of an annual survey of foreign investors in real estate indicated they plan to invest some debt or equity in U.S. real estate before 2009 ends, even though many have not made any such investments so far. "Three quarters of the survey respondents had not yet invested in 2009; however, more than two-thirds of them plan to invest some debt or equity in U.S. real estate before the end of the year," the Association of Foreign Investors in Real Estate, Washington, said. Thirty-one percent of the respondents to the survey conducted by the University of Wisconsin-Madison's James A. Graaskamp Center for Real Estate said they were more optimistic than at the beginning of the year, while 16% said they were more pessimistic and 53% said their expectations had not changed.

How bad is the new home business in California? Pretty bad, according to the chairman of the California Building Industry Association, and it goes way beyond housing starts and sales. "Every builder I know has laid off most of their staff, and contractors and suppliers we've done business with for years have folded up shop," builder Horace Hogan II told reporters at the Pacific Coast Builders Conference in San Francisco. "I can assure you this is the worst housing recession we've ever experienced." As bad as it was last year, when builders in the Golden State pulled just 65,000 permits, "2009 looks like it might be worse," Mr. Hogan said. Currently, the Construction Industry Research Board is projecting construction will start on a mere 40,000 units this year. "California's homebuilding industry is in the worst shape ever," the industry leader said.

A California tax credit that grants buyers of new homes in the state a $10,000 tax credit has proved to be so popular it may soon max out — nine months before its expiration date. According to California's Franchise Tax Board, "we will soon reach $100 million in new home credit applications" which is the maximum set by law. The state notes in a release that once the threshold is met "the tax credit will no longer be available." A spokeswoman for the governor's office told National Mortgage News that the state is aware of the problem. "It's been very successful," she said. "There may be a bill to extend it or increase the amount of money allocated." The tax credit expires March 2010. It applies to all homebuyers in the state but only if they purchase a newly built home that has not been occupied.

There was a very slight decrease in the amount of commercial/multifamily mortgage debt outstanding between the end of the fourth quarter 2008 and the end of the first quarter of 2009, according to the Mortgage Bankers Association. There is $3.48 trillion outstanding as of March 31, 2009, down by $33 million, according to MBA's analysis of the Federal Reserve Board Flow of Funds data. Multifamily debt outstanding increased by 0.6% to $908 billion. "Banks, thrifts, Fannie Mae and Freddie Mac all increased their holdings of commercial and multifamily mortgages during the first quarter, while run-off among CMBS and life company loans decreased those investors' holdings," said Jamie Woodwell, MBA's vice president of commercial real estate research. "The relatively long-term nature of commercial real estate finance has meant greater stability in the levels of commercial and multifamily mortgage debt outstanding than is seen among many other types of credit." Commercial banks hold 45% of the total, followed by private label securitization issuers at 21%, life insurers 9% and thrifts 6%. The government sponsored enterprises hold $191 million of multifamily loans to support securities they issued, plus an additional $154 billion of whole loans.

A bank's underwriting on a subprime mortgage was not as strong if it planned to sell the loan to be securitized as opposed to keeping it in portfolio, a study from a professor at the University of Michigan Ross School of Business found. According to Amiyatosh Purnanandam, the more a bank participated in what he termed the "originate-to-distribute" market, the larger its charge-offs and defaults were after 2007. These loans were more likely to default than the ones banks kept and this discrepancy cannot be explained by differences in the geographic location of the property. Therefore, it wasn't just the economic slowdown that caused the subprime mortgage crisis, it was an "incentive problem" because the banks weren't as discerning about the borrower if they planned to sell the loan. "The basic premise is that there was this perverse incentive," said Mr. Purnanandam. "The screening came down, and the banks were willing to lend to folks they otherwise would not have. We find a systematic pattern in that the banks that were originating and selling their mortgages are suffering disproportionately more." Furthermore, banks that relied more on demand deposits for funding were more likely to write better quality loans than those that relied on the financial markets. From a risk management perspective, Mr. Purnanandam said, regulators need to look at how a bank is funded and not just its actions.