Origination

Federal Reserve Board Chairman Ben S. Bernanke came very close to endorsing a bill the House of Representatives is scheduled to vote on this week that would allow the Federal Housing Administration to refinance borrowers with "underwater" mortgages. The widespread decline in house prices requires lenders and servicers to develop new and flexible strategies to prevent foreclosures, the Fed chairman said in an address to the Columbia Business School. "[T]he best solution may be a writedown of principal or other permanent modification of the loan by the servicers, perhaps combined with a refinancing by the FHA or another lender," he said. The House Financial Services Committee approved an FHA refinancing bill (H.R. 5830) by a 46-21 vote May 1 that offers investors/servicers an option to refinance an underwater mortgage into an FHA-insured loan if they agree to write down the loan amount to 85% of the current appraised value. "It's in everyone's interest" to prevent avoidable foreclosures, Mr. Bernanke said, because of the "spillover effects" rising foreclosures can have on the financial markets and broader economy.

The chairman-elect of the Mortgage Bankers Association has taken Fannie Mae and Freddie Mac to task for "penalizing future borrowers" for the past sins of granting financing to previous borrowers who weren't nearly as deserving. David Kittle, the president of Principle Wholesale Lending, Louisville, Ky., who takes the MBA's reins in October, questioned the need for the government-sponsored enterprises to charge higher fees for loans with smaller downpayments, borrowers with FICO scores between 650 and 680, or on houses located in so-called declining markets. Speaking to reporters at the MBA's National Secondary Market Conference in Boston, Mr. Kittle said, "We're making better loans today than we ever have. So if we're underwriting better, what's the need for the fees?" The MBA officer said the fees are adding $750 to the cost of every $100,000 borrowed, so borrowers who care about cash are opting for loans insured by the Federal Housing Administration. "A FICO score of 660 with 10% down is a good loan, but they've pushed that entire market to the FHA," he said of the GSEs.

With Congress in crisis mode, the Mortgage Bankers Association is calling on lawmakers to take care of "unfinished business" by addressing policy issues that have, in some cases, lingered for years. Issuing a 10-point "Agenda to Stabilize the Housing Market," the MBA said at its National Secondary Market Conference in Boston that lawmakers need to step back from their "crisis mentality" and focus on basic policies to steady the mortgage market, help distressed borrowers, and ensure that today's problems don't recur. "We're saying to Congress to be very careful, and don't overreact," MBA senior vice president Steve O'Connor said at a press briefing. The MBA's 10-point plan includes some well-worn items, such as modernizing the Federal Housing Administration and reforming the regulatory structure governing Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. But it also backs away from its previous stance that only mortgage brokers should be licensed. Now, the MBA says that with the exception of those who work directly for federally regulated institutions, all individual single-family loan originators should be licensed. "We support the licensing of all people, including direct lenders," said David Kittle, the MBA's chairman-elect. "We've come off that exception." The MBA can be found online at http://www.mortgagebankers.org.

National statistics that show deeply declining house prices are driven by only a few states, the Mortgage Bankers Association's top economist has warned. Because the numbers are heavily weighted by sales in California and Florida, house price figures as reported by the Case-Shiller and OFHEO indices are "not representative of the entire country," acting chief economist Jay Brinkman said at the MBA's National Secondary Market Conference in Boston. Mr. Brinkman pointed out that the states that registered the biggest jump in prices in the first part of the decade are those that have also recorded the greatest declines. Moreover, prices in "most states" are still at the highest levels ever recorded, he added. The economist said most price declines are driven largely by the needs of builders, investors, and recent buyers of houses erected since 2000 to sell houses. "It's the newer neighborhoods that are driving prices," he said. "Prices in established neighborhoods are holding their own" because the owners don't have to sell. Mr. Brinkman said one drag on housing sales will be the fact that many first-time buyers in their 30s will not be available because they bought in their 20s. But he also said this negative could be offset, depending on how soon renters believe the for-sale sector has hit bottom. "If there is an error" in housing forecasts, he said, "it's in how many renters will perceive the market has reached the bottom and become buyers."

The performance of closed-end second-lien mortgages has devolved to the point where they are "basically a writeoff," according to Standard & Poor's managing director Susan Barnes. Speaking at the Mortgage Bankers Association's National Secondary Market Conference in Boston, Ms. Barnes said closed-end seconds are "performing horribly" but that home equity lines of credit are "better" because they are typically originated by banks, which have stronger relationships with borrowers. S&P recently stopped rating seconds, saying it might resume at some point if it were able to get a sense that the asset class's performance had become predictable again. The rating agency can be found online at http://www.standardandpoors.com.

Fannie Mae has reported a $2.2 billion loss for the first quarter, down from a $3.6 billion loss in the fourth quarter, and said it plans to raise $6 billion in additional capital through offerings of common and preferred stock. The mortgage giant said its also plans to introduce a refinancing option for "underwater" borrowers that allows borrowers with Fannie-owned loans to refinance up to 120% of the property's current value. Fannie Mae's net revenue rose by $700 million in the first quarter to $3.8 billion, but that was offset by fair-value losses and $3.2 billion in credit-related expenses. The government-sponsored enterprise said 43% of its credit losses stem from its $310.5 billion alternative-A mortgage loan portfolio. Fannie also recognized a $1.1 billion loss on its investments in private-label securities backed by alt-A and subprime mortgages. Separately, the Office of Federal Housing Enterprise Oversight has agreed to lower Fannie's capital surplus requirement from 20% to 15% as a result of the stock offering. The regulator also lifted a 2006 consent order Fannie signed in 2006. The GSE can be found online at http://www.fanniemae.com.

Fifty additional classes of subprime mortgage-backed securities were downgraded by Fitch Ratings on May 2. Fitch also affirmed the ratings on classes with outstanding balances of more than $1.3 billion. The securities affected by the latest downgrades were: 22 classes from eight issues by Merrill Lynch Mortgage Investors; 15 classes from 10 issues by Asset Backed Funding Corp.; eight classes from three issues by Specialty Underwriting and Residential Finance; and five classes from four issues by Countrywide (CWABS).

Fitch Ratings has downgraded 91 classes of notes from 17 collateralized debt obligations backed partly by subprime residential mortgage-backed securities. Among the affected securities are: 10 classes of notes issued by Duke Funding High Grade III Ltd.; eight classes issued by Monterey CDO Ltd./LLC; eight classes issued by Dalton CDO Ltd.; eight classes issued by Orient Point CDO Ltd.; seven classes issued by Kleros Preferred Funding II Ltd.; six classes issued by ABS CDO II Ltd./LLC; six classes issued by Bernoulli High Grade CDO I Ltd./Inc.; six classes issued by Broderick CDO 1 Ltd.; six classes issued by Ipswich Street CDO Ltd./LLC; six classes issued by Fort Sheridan ABS CDO Ltd.; five classes issued by Duke Funding X CDO Ltd./Corp.; four classes issued by C-BASS CBO XIV Ltd.; three classes issued by Benazzi CDO 2005-1 Ltd.; three classes issued by TORO ABS CDO I Ltd.; one class issued by Salisbury International Investments Ltd.; and one class issued by Marathon Structured Funding I LLC. Fitch attributed the downgrades to "significant collateral deterioration" in the portfolios' subprime RMBS and, in most cases, alternative-A RMBS and structured finance CDOs with underlying exposure to subprime RMBS. the rating agency can be found online at http://www.fitchratings.com.

RMR Advisors Inc., Newton, Mass., has announced the launch of its first open-end mutual fund, RMR Real Estate Securities Fund. The new fund will seek total return through capital appreciation and current income from investments in real estate securities. It will normally invest at least 80% of its total assets in common and preferred stocks of real estate investment trusts, RMR said. The company can be found on the Web at http://www.rmrfunds.com.

WSFS Bank, a subsidiary of WSFS Financial Corp., Wilmington, Del., has acquired a majority interest in 1st Reverse Mortgage Financial Services LLC, a Westmont, Ill.-based reverse mortgage wholesaler. "In addition to WSFS's long history and extensive experience with the reverse mortgage business, this acquisition is the right investment in the right industry at the right time, especially as baby boomers need more choices to finance their retirements," said Mark A. Turner, WSFS's president and chief executive. "1st Reverse has been making loans for more than a year now and, to reach its significant potential, will need the investment and resources that WSFS can provide. As with many new initiatives, we expect modest start-up losses in the first year, but believe the revenue and profit opportunities of providing this product are great." 1st Reverse will retain its name, headquarters, and its management team will remain in place.