Originations

Multifamily and commercial debt outstanding combined dropped in the first quarter but the multifamily component increased a bit, according to a recently released Mortgage Bankers Association analysis of Federal Flow of Funds data. While commercial/multifamily debt dropped by $31 billion or 0.9% to $3.31 trillion between the fourth quarter of 2009 in the first quarter of this year, multifamily jumped by $3 billion or 0.4% to $852 billion. "Low levels of commercial mortgage borrowing mean that property investors are paying off and paying down more in mortgages than they are taking out," said Jamie Woodwell MBA's vice president of commercial real estate research. "The balance of construction loans at banks, and commercial and multifamily mortgages held in CMBS and by life insurance companies, saw the largest declines. The balance of multifamily mortgages backed by Fannie Mae, Freddie Mac and FHA saw the largest increase."

The American Securitization Forum called for the Senate to "seriously consider and accept the House offer on covered bonds." The ASF said it believes the amendment would "facilitate...a covered bond market as it includes important provisions for default and insolvency of covered bond issuers. The group, which represents both buyers and sellers of securitizations, also noted that it feels the House offer "subjects covered bonds to appropriate securities regulation by federal regulators."

House and Senate conferees shaping the final regulatory reform bill tentatively accepted an amendment by Rep. Scott Garrett, R-N.J., that would create a new legal and regulatory framework for the development of a covered bond market in the United States. Bank issuance of covered bonds backed by residential and commercial mortgages is more common in Europe. Foreign banks service and keep the mortgages on their books in a manner unlike the mortgage-backed securities used more commonly in U.S. where the underlying mortgages have traditionally been placed in separate, off-balance-sheet trusts. "Covered bond legislation offers a way for the government to provide some certainty for private enterprises to find a way to generate liquidity through innovation of a new marketplace," Rep. Garrett said. The New Jersey congressman also stressed that covered bonds would open the door for lenders to originate mortgages that are not guaranteed by the government. Under the Garrett amendment, the Treasury Department would be the primary regulator of covered bonds, and set standards and reporting requirements for issuers. But for the market to move forward, the Federal Deposit Insurance Corp. must continue its policy of not seizing mortgages that are backing covered bonds when the sponsor bank fails. House Financial Services Committee chairman Barney Frank, D-Mass., noted that Treasury and FDIC officials have raised some questions about the covered bond proposal. Rep. Frank said the conferees would not formally approve the Garrett amendment until Thursday, giving regulators time to refine their concerns and "tell us what they are," Frank said. Sen. Bob Corker, R-Tenn., was prepared to offer a similar covered bond amendment on the Senate side but House members offered their amendments to the regulatory reform bill first.

Treasury secretary Timothy Geithner early next year plans to present a proposal for "fundamental reform" of Fannie Mae and Freddie Mac along with other facets of the housing finance system. He told a TARP Congressional oversight panel that Treasury officials are examining options for restructuring the GSEs which have been in conservatorship for almost 20 months and could wind up costing taxpayers $400 billion. Together, the two account for about 70% of all originations in the nation. FHA accounts for most of the balance with portfolio lending (mostly jumbo) making up a sliver of all originations. The secretary said the agency will not stop with its study of Fannie and Freddie. "The range of things that contributed to this mess went well beyond the basic incentive problems and moral hazard problems that prevailed at the GSEs," he said. He told the Troubled Asset Relief Program panel that today Fannie and Freddie are being managed more conservatively. "At our insistence, they have put in place much more conservative underwriting standards. They are charging more for their guarantees to remedy some of the mistakes they made earlier," he said.

It is unlikely that purchase mortgage origination volume will top $530 billion this year, as the negatives in the economy far outweigh the positives, said market research firm iEmergent. The company is basing its latest forecast of $528 billion (a cut of over 5% from its previous projections) in purchase loans on increasingly wary customers, the shift forward in purchase patterns caused by the tax credit, a projected rise in interest rates by the end of the year, falling home prices and a slight decrease in average loan size. In the first quarter of the year, the firm projected $557 billion in purchase volume for 2010. It has also cut its refinance forecast by 5% from between $531 billion and $643 billion down to a range of $504 billion to $610 billion. This brings the total volume projection to between $1.03 trillion to $1.14 trillion. Dennis Hedlund, president of iEmergent, said "The second half of this year looks to be a continued struggle for U.S. households, and by default-no pun intended-for the home financing industry. There are not enough positives to fuel a big upswing in the housing market, because the demand-side-U.S. households and homeowners-remain stuck in big negatives. Job anxieties, extended under- and unemployment, the existence of too much debt, no savings, tougher credit, foreclosures, and mistrust of banks are just a few of the negatives that will smother consumer confidence for the rest of the year and likely into 2011."

The Mortgage Bankers Association's Market Composite Index over the past few weeks has been moving in a zigzag pattern and the latest week's decline was no exception. During the week ended June 18, the MCI once again "zagged" downward, this time decreasing 5.9% on a seasonally adjusted basis and by 6.0% on an unadjusted basis when compared with the previous week. The Refinance Index decreased 7.3% and the seasonally adjusted Purchase Index decreased 1.2%. MBA said the decline in total purchase applications is driven by a 4.4% decrease in government applications, while conventional purchase applications increased by 1.0%. The refinance share of mortgage activity decreased to 73.8% of total applications from 74.8% the previous week, while the adjustable-rate mortgage share of activity fell to 4.9% from 5.2%. The decline in application volume occurred even as the average contract interest rate for the 30-year fixed-rate mortgage fell to 4.75% from 4.82% for the current week with points increasing to 1.07% from 0.89 (including the origination fee) for loans with an 80% percent loan-to-value ratio, according to the association. The average contract interest rate for 15-year FRMs fell 4 basis points during the week to 4.19%, and the average contract interest rate for one-year ARMs showed a 2 bps decline to 7.05%.

New home sales plunged 33% in May after the expiring homebuyer tax credit pushed sales in April to the highest level since August 2008. Most housing analysts expected a decline but not one this significant. "We all knew there would be a housing hangover from the expiration of the tax credit," said Mike Larson of Weiss Research, "but this decline takes your breath away." According to the U.S. Census Bureau, sales of newly constructed single-family homes dropped to a seasonally adjusted annual rate of 300,000 in May from a 446,000 rate in April. The 300,000 sales rate is the lowest rate since September 1981. April sales were revised downward by 58,000 units. The April 30 expiration of the federal homebuyer tax credit hit sales on new homes harder than existing homes because builders have low inventories and the construction must be completed in time to close by June 30. "Today's report was below expectations, but the underlying level of demand will not be apparent until the distortionary effects coming from the tax credit fade," said a report from Barclays Capital. "We expect new home sales to bottom over the next couple of months and to return to a gradual upward trend thereafter." National Association of Home Builders senior economist Bernard Markstein noted that the tax credit pulled sales forward, adding that it will be difficult to get a true reading of where the market is headed until sales settle out in July and August.

The House has passed a stand-alone bill to re-authorize the National Flood Insurance Program, which has not been able to issue new policies for the past three weeks. The bill (H.R. 5569) extends the NFIP until Sept. 30 and makes the re-authorization retroactive to May 31 when the Federal Emergency Management Agency had to stop issuing new flood insurance policies. "This is the third time this year that the flood insurance program has expired, causing disruption in the housing market in cases where individuals are trying to purchase a home located in a flood plain," said Rep. Gary Miller, R-Calif. The House passed the September extension Wednesday morning by a voice vote. The National Association of Realtors and other housing groups want the Senate to act quickly. The Senate is currently deadlocked over a $100 billion jobs bill passed by the House several weeks ago that includes an extension of the flood insurance program.

Banco Santander of Spain is trying to resurrect talks to combine its U.S. business with M&T Bank Corp. after negotiations collapsed last month, according to combined news reports. Both banks are mid-sized players in the U.S. mortgage market. Santander owns Sovereign Bank of Pennsylvania, which is also a top ranked warehouse provider. The two firms recently scheduled a meeting between executives to discuss combining operations but there's still disagreement on who would control the resulting bank franchise. The same issue hampered talks that collapsed in May.

Home prices rose just under 1% in April for the second consecutive month following declines during the first two months of this year, according to the CoreLogic housing price index. The CoreLogic HPI posted a 0.1% increase in March after dropping 2% in February and 1.6% in January. "The monthly increase in the HPI shows the lingering effects of the homebuyer tax credit," said Mark Fleming, chief economist for CoreLogic. The tax credit expired April 30. "We expect that we will see home prices remain strong through early summer, but in the second half of the year we expect price growth to soften and possibly decline moderately," Fleming said. The CoreLogic HPI is not seasonally adjusted and includes distressed sales. House prices have risen 2.6% during the 12-month period ending April 30. Excluding distressed sales, the HPI is up 2.3% during the same 12-month period.

Sales of existing single-family homes fell 1.6% in May with the expiration of federal tax credits and problems with mortgagors obtaining flood insurance policies. The National Association of Realtors reported that sales of previously owned single-family homes fell to a seasonally adjusted annual rate of 4.98 million units from a 5.06 million rate in April. The homebuyer tax credit expired April 30, but buyers still have until June 30 to close and qualify for the benefit. Legislation is pending in Congress to extend the closing date into the fall. (NAR and other trade groups want a closing deadline of Sept. 30.) NAR chief economist Lawrence Yun noted that many sales are being delayed because of an interruption in the National Flood Insurance Program. "Approximately 180,000 home buyers who have signed a contract in good faith to receive the tax credit may not be able to finalize it by the end of June due to delays in the mortgage process, particularly for short sales," Yun said. NAR economists expect to see one more month of elevated home sales before they start to trail off. The trade group reported that the national median existing-home price for all housing types was $179,600 in May, up 2.7% from a year ago. During the month distressed home sales slipped to 31% of all purchases, compared to 33% in April and 33% in May 2009.

So-called "sidelined sellers" who have been trying to wait out the housing downturn appear to be testing the waters in South Florida. Just as the resale market in the three-county area that includes Miami-Dade, Broward and Palm Beach counties is starting to show signs of life, "a small but increasing number" of patient owners have put out for-sale signs in front of their houses and apartments, according to a new report from Condo Vultures, Bal Harbour. So far in June, the number of listings has increased week-over-week, to nearly 66,400. Seven weeks ago, 65,100 residences were for sale. "Some of these sellers are patient owners who still have some equity in their homes and would like to move but not necessarily unload at a foreclosure-like price," said Peter Zalewski, a principal in the consulting firm. "It is premature to call this the beginning of double dip but it is worth monitoring." According to Zillow economist Stan Humphries, who coined the term sidelined sellers, there are more than 5 million "highly motivated" owners like those in South Florida just itching to sell once they sense a rebound. He believes that as they enter the market, they will serve to stifle whatever rebound in values might have otherwise been building.

Bank of America issued $30.8 billion of mortgage-backed securities guaranteed by the Government National Mortgage Association in the first quarter, ranking first among all players in the sector. According to figures issued by the Department of Housing and Urban Development and compiled by NMN, B of A's GNMA market share totaled 36% (rounded) during the quarter. Its next closest competitor was Wells Fargo & Co. with $22.9 billion (market share of 27%). Together these two 'mega' lenders control 63% of the GNMA market. (Both are top ranked GNMA servicers too.) During the quarter, all mortgage bankers issued $84.7 billion of GNMAs. January, though, was the strongest month in terms of issuance volume with $36.5 billion.

House Financial Services Committee chairman Barney Frank, D-Mass., is asking Senate conferees to drop a "qualified" mortgage exemption that would allow nongovernment loans to be securitized without risk retention. In reconciling the House and Senate financial services regulatory reform bills, Rep. Frank is offering to totally exempt Federal Housing Administration, Department of Veterans Affairs, and Rural Housing Service guaranteed loans from a 5% risk retention requirement for MBS issuers. However, issuers of Fannie Mae and Freddie Mac MBS would have to retain 5% of the credit risk under the Frank proposal. "It would create a huge imbalance in the marketplace in favor of FHA and VA loans," said Glen Corso, managing director of the Community Mortgage Banking Project. Mortgage industry groups prefer a Senate-passed provision that would allow regulators to totally exempt safe, fully documented mortgages from risk retention, which presumably would encompass Fannie/Freddie loans. Industry groups claim qualified mortgages that are exempt from risk retention and shielded from liability could lead to a revival of the private mortgage market. "The lack of a true safe harbor for following federally mandated minimum standards for a qualified mortgage will result in lenders and investors establishing even tighter credit standards than those called for in the qualified mortgage or avoiding residential mortgage investments altogether because of the potential for excessive legal risks," the joint letter says. House and Senate conferees are in meetings, trying to work out differences on such mortgage related issues as yield spread premiums, appraisals, underwriting standards, risk retention, and the creation of a consumer protection agency.

Fannie Mae and Freddie Mac are increasing their use of short sales which is considered a better alternative for lenders and homeowners than a foreclosure sale, according to a report by their regulator. The Federal Housing Finance Agency says the two government sponsored enterprises completed 23,400 short sales in the first quarter, compared to just 8,050 a year ago. GSE servicers are expected to implement a new 'Home Affordable Foreclosure Alternative' program by August 1 that places more emphasis on short sales as an alternative to foreclosure. Fannie and Freddie completed 92,760 foreclosure sales in the first quarter, up 27% from the previous quarter. Short sales allow the homeowner to walk away from their house debt free and generally results in a higher sales price and less expenses than a foreclosure or REO. An Amherst Securities Group report shows that short sales have a significantly lower loss severity than REO sales, "but that difference has been narrowing over time." ASG analysts note that servicers are becoming more proficient at short sales. However, the loan-to-value ratios on short sales have been increasing relative to REO sales. And the amount of servicer advances has increased more for short sales than for foreclosures. "We believe the narrowing between short sale and REO sale is largely complete," Amherst says.

Even though originations in the primary market are beginning to sputter, it appears that warehouse lending to nonbanks is picking up a head of steam. According to exclusive survey figures compiled by National Mortgage News, warehouse commitment volumes totaled $31 billion at the end of March, a 20% increase from a year earlier. (In calculating its numbers, NMN assumes it has captured 70% of the market.) Bank of America Corp. is the presumed market leader, with $15 billion of commitments at March 31. The Charlotte company declined to confirm or deny the figure, which is based on comments made by a B of A warehouse official at a Texas Mortgage Bankers Association meeting this spring. Bank of America is a leading correspondent buyer of mortgages, and offers warehouse lines to nonbanks that sell loans to it. In fact, most top correspondent buyers of mortgages — B of A, Wells Fargo & Co. and JPMorgan Chase & Co. — offer some type of warehouse program, but none would talk about their programs publicly. According to advisers like Larry Charbonneau and Michele Perrin, more community and regional banks are eyeing the warehouse market because the profit margins remain quite strong.

CoreLogic Credco has launched Instant Merge LQ and ENCORE LQ to help lenders be compliant with Fannie Mae Loan Quality Initiative requirements. Instant Merge LQ and ENCORE LQ were created to help lenders satisfy requirements under the new Fannie Mae LQI, an initiative designed to help lenders avoid loan buybacks. LQI, which went into effect June 1, 2010, requires lenders to proactively verify identity and disclose the status of all borrower debts immediately prior to pre-funding of the loan, including open and closed tradelines, public records filings or any new inquiries on the credit file. Credco's Instant Merge LQ is a solution for lenders to satisfy prefunding credit refreshes, while ENCORE LQ enables lenders to check credit, identity verification, property data, occupancy status and exclusionary list screening. Both generate a reporting solution for underwriter review.

Impact Community Capital has come to market with a $302 million affordable multifamily housing deal. The securitization is backed solely by affordable housing loans. The A-1 portion that priced at 225 basis points over interpolated swaps is worth $235 million while the A-2 tranche that priced at 230 basis points over interpolated swaps was worth $33.9 million. Credit enhancement on the senior tranche is 22.2% and 11% on the junior portion. Tranche A-1 was broadly syndicated while the rest of the deal was retained by the issuer. The issuer, which is owned by a consortium of insurance companies, was formed to create socially responsible investing (SRI) by insurance firms in California's low-income communities. These companies want to demonstrate that they can create SRIs that have good returns. The issuer said it has attracted more than $1 billion of investment commitments to date. The sole book runner on the two-tranche, 144A offering is Barclays Capital.

Life companies are likely to report material increases in credit related losses due to their commercial mortgage holdings this year and next, said Fitch Ratings, Chicago. During 2009, there were realized losses on directly placed mortgages with life companies totaling $1.5 billion. For the entire down cycle, Fitch's base case loss projections are approximately $6 billion. This, the rating agency said, implies additional losses on commercial mortgages of between $4 billion and $5 billion during 2010 and 2011. Fitch points out that 99.6% of the mortgage loans held by life insurers are in good standing as of Dec. 31, 2009, a significantly better performance than the commercial mortgage-backed securities market and mortgages held by banks. "While Fitch believes that reported rates of mortgage loan delinquencies, foreclosures and restructurings may be a less meaningful measure of performance in this cycle due to increased active management of mortgage loan portfolios (i.e., loan sales), these traditional performance measures are expected to show a significant deterioration in 2010 and 2011," the rating agency said.

Federal Deposit Insurance Corp. chairman Sheila Bair is warning against indefinite government control of Fannie Mae and Freddie Mac. In a recent speech on housing policy, Bair said some government involvement in mortgage finance is "certainly justified." But the nation's financial crisis, which included the 2008 seizure of the GSEs by their regulator and the Treasury (to prevent their collapse) proved "any such program must be much more definitive about where the financial obligation of taxpayers begins and ends," she said. In prepared remarks at the Wharton School's International Housing Finance Program, she noted that "there are a variety of options for making some of their functions governmental while putting others in private hands." The FDIC chief said policymakers should address the government's role with the enterprises after financial regulatory reform is finished. "After the financial reform package becomes law, GSE reform should rise to the top of the agenda," Bair said. "The goal must be to clarify once and for all which functions should be governmental, and which are strictly subject to the discipline of the marketplace."