Origination

Lenders and servicers choosing to participate in a special Federal Housing Administration refinancing program will have to worry about "second guessing" by FHA, which has a reputation for seeking indemnification for losses when loans go into default, according to mortgage banking attorney Laurence Platt. "Presumably, lenders that closely follow the new underwriting requirements developed by the [Hope for Homeowners Oversight] Board will be insulated from attack by FHA," the K&L Gates partner says in a Mortgage Banking Alert to clients. However, the Hope program loans are expected to have high default rates because lenders will be refinancing subprime borrowers that have defaulted or are expected to default. "It will be interesting to see how 'squishy' the new underwriting guidelines are, because the risk of second-guessing is greater when the standards are more ambiguous," the Sept. 2 alert says. Meanwhile, the House Financial Services Committee is holding a hearing Sept. 17 to see if FHA and the oversight board will be ready to launch the Hope program by Oct. 1. Committee chairman Barney Frank, D-Mass., also wants to know if servicers are holding off on foreclosures for borrowers who might be refinanced through the Hope program.

Michael Nierenberg from JP Morgan will be joining New York-based Merrill Lynch & Co. to head global mortgages and securitized products businesses, and James De Mare from Citigroup will also be joining to run the company's mortgage trading operations. Mr. Nierenberg will report directly to Thomas K. Montag, head of global sales and trading, and Mr. De Mare will report to Mr. Nierenberg. Mr. Nierenberg was most recently JP Morgan's head of global securitized products, a position he held after moving to that firm following its purchase of Bear Stearns earlier this year. Mr. Nierenberg joined Bear Stearns in 1994, moving quickly through the ranks to hold positions such as head of interest rate and foreign exchange trading operations, co-head of structured products and co-head of mortgage-backed securities trading. Before Bear Stearns, Mr. Nierenberg spent seven years at Lehman Brothers, where he was instrumental in building up that firm's adjustable rate mortgage business. Mr. De Mare was with Citigroup for 11 years, having most recently served as the global head of mortgage trading, which included the trading of all securitized products in Citigroup's fixed income currencies and commodities group. He joined Salomon Brothers in 1997 to run its adjustable rate trading business. Prior to joining Salomon in 1997, Mr. De Mare traded agency and non-agency adjustable rate mortgages at Bear Stearns and Prudential Securities.

The dollar volume of primary new mortgage insurance written and the number of applications received both hit new lows for the year in July, according to data provided by the Mortgage Insurance Cos. of America. Total primary new insurance written for the month was $12.3 billion (all but $31 million through the traditional channel), a decline from June's $13.7 billion, which had been the low point. Application volume fell from 90,868 in June to 86,734 in July. July's data, according to MICA does not include Triad Guaranty Insurance Corp., which went into run-off during the month. It also does not include Radian Guaranty, which is not a member of the group. Primary insurance in force is $801.6 billion down from $863 billion, but the decline is due to Triad's removal. The cure/default ratio fell from 63.6% to 57.0%, with 39,229 cures and 68,831 defaults. New pool risk written in July was $31.9 million, compared with $30.1 million in June.

The Federal Reserve Board needs to adjust its benchmark for subprime loans so it does not "misclassify" prime jumbo loans, as well as prime loans with government or private mortgage insurance, and reduce the availably of mortgage credit, according to five major trade groups. Without adjustments for these types of loans, the Home Mortgage Disclosure Act data will misclassify prime loans and many prime loans will be treated as subprime under the Home Ownership and Equity Protection Act, according to their comment letter. The American Bankers Association, American Financial Services Association, Consumer Bankers Association, Consumer Mortgage Association and Mortgage Bankers Association sent the Aug. 29 letter in response to a HMDA proposal. "Applying the new HOEPA rules - and liability - to large segments of the prime market will decrease the availability and affordability of mortgages," the signers warn. As part of an overhaul of its HOEPA regulations in July to stop deceptive subprime lending practices, the Fed adopted the weekly Freddie Mac primary mortgage market survey plus 150 basis points as its benchmark for determining subprime loans. Now the Fed is proposing to use the same benchmark for HMDA reporting. The industry commenters point out that the interest rate on the average jumbo loan has exceeded the benchmark for almost every week for the past six months.

Fitch Ratings on Tuesday downgraded Fannie Mae and Freddie Mac's preferred shares, while noting that the capital levels at both "remains adequate for the intermediate term." Fitch downgraded Fannie's preferred to BBB- from A+. Freddie was downgraded to BBB- from A. In a statement Fitch writes that the "lack of reliable access to the public equity markets appears to be more permanent" than it had anticipated, adding that the GSEs' "ability to access equity markets may need to be precipitated or replaced by more tangible forms of government support." Fitch does not expect either company to be profitable this year or next. It cites Fannie and Freddie's large holdings of subprime and alt-A assets as a chief reason for its concerns.

The nation's tenth bank failure this year, Integrity Bank, had 60% of its assets tied up in construction and development loans and 50% of those loans were seriously delinquent when Georgia regulators closed the $1.1 billion bank. The Federal Deposit Insurance Corp. sold the deposits for a 1% premium to Regions Bank, Birmingham, but FDIC will have to sell off the assets, including the $668.4 million in C&D loans and $8.5 million in real estate owned. The Alpharetta, Ga., bank reported a $33.6 million loss for the second quarter. FDIC estimates the failure will cost the deposit insurance fund $250 million to $350 million.

Goldman Sachs & Co., has agreed to purchase $1.17 billion in loans - including subprime assets - and their servicing rights from Popular Inc., a depository based in San Juan, P.R. Details were not available at press time, but in a statement Popular (stock symbol: BPOP) said it will book a $450 million loss in regard to the sale. "We are continuing to narrow the scope of our mainland U.S. operations that are most exposed to the credit and mortgage markets," said Popular chairman and president Richard Carrion.

Thirty-six classes of notes issued by seven collateralized debt obligations with exposure to subprime residential mortgage-backed securities have been downgraded by Fitch Ratings. All but one of the downgraded classes were removed from Rating Watch Negative. The affected securities are as follows: eight classes from Independence VII CDO Ltd., a cash flow structured finance CDO; seven classes from Whateley CDO I Ltd., a cash flow CDO; six classes from Duke Funding VIII Ltd., a cash flow structured finance CDO; six classes from Straits Global ABS CDO I Ltd., a cash flow structured finance CDO; five classes from Capmark VI Ltd. and Capmark VI Delaware Corp., a hybrid CDO; three classes from South Coast Funding I Ltd., a cash flow structured finance CDO; and one class from ABSpoke 2005-X Ltd., a partially funded static synthetic structured finance CDO. The downgrades were attributed to collateral and credit deterioration in the portfolios, especially in subprime RMBS, alternative-A RMBS, or structured finance CDOs.

Mack-Cali Realty, a real estate investment trust based in Edison, N.J., has been designated the "Bear of the Day" for Aug. 29 by Zacks Equity Research, Chicago. The Bear of the Day is a stock expected to underperform the markets over the next three to six months. Zacks said it is maintaining its Sell recommendation on the office REIT "due to macroeconomic factors" and that suburban office landlords are expected to "have a tough time over the next 12 months." Office occupancies in the company's core markets have risen rapidly, making it difficult to hold occupancy and increase rents, the research firm said. Zacks can be found online at http://www.zacks.com, and Mack-Cali can be found at http://www.mack-cali.com.

The PMI Group Inc., a mortgage insurer based in Walnut Creek, Calif., has announced the signing of an agreement to sell its Asia operations to QBE Insurance Group Ltd. PMI said the purchase price of approximately $56 million (subject to adjustment under certain circumstances) represents approximately 100% of the net tangible asset value of PMI Asia under U.S. generally accepted accounting principles as of June 30. The price will be payable 80% in cash and 20% in the form of a promissory note issued by QBE. "This transaction represents further progress in the execution of our five-point plan and provides additional financial resources to support our holding company and core U.S. mortgage insurance business," said Steve Smith, PMI's chairman and chief executive. PMI can be found on the Web at http://www.pmigroup.com.