Originations

Even though home values continued to firm up in December, the man who created the Standard & Poor's/Case-Shiller index is worried that "underwater borrowers" will eventually stop making payments, sending delinquency rates rising again. In a conference call discussing housing prices, Robert Shiller, chief economist for MacroMarkets LLC, noted that 80% of underwater homeowners are continuing to make payments "but I'm worried about what will happen if they stop paying." David Blitzer, chairman of S&P's index committee, cautioned that one of great unknowns for housing is whether "the idea you did whatever it takes" to make the mortgage payment is fading. Still, the new indices released Tuesday show that home values rose for the seventh straight month in December. The S&P/Case 20-city home price index rose 0.3% during the month compared to November. Compared to December 2008, the index fell 3.1%. Five of 20 cities in the index showed declines from November to December. The index is now up more than 3% from its bottom in May, but still 30% below its May 2006 peak. Los Angeles and Phoenix posted the largest price increases. The worst performer was Chicago with a 0.6% decline.

Arch Bay Capital has issued a $57.4 million MBS backed by seasoned performing and delinquent subprime loans, garnering a AAA rating on the bond, a sign that the private-label market could come back but only if issuers are willing to make little money on their deals. The mortgage-backed security was rated by DBRS and the end investor is a bank, said one official familiar with the transaction. Quincy Tang, senior vice president of structured finance/RMBS for DBRS, told National Mortgage News that because of the credit enhancement put on the security by Arch Bay, the investor in the AAA bond will not suffer any losses unless delinquencies on the underlying loans exceed 75%, an astronomical number. The loans — originally funded a few years back by such subprime firms as Accredited Home Loans, NovaStar Mortgage and others — have a 30-day delinquency rate of 21%. The collateral for the bond are loans with a principal balance of $229 million. One NPL investor, requesting anonymity, said based on what he knows of the deal, Arch Bay doesn't stand to make much money, if any, on the transaction. The Irvine, Calif.-based hedge fund could not be reached for comment. Its profit will be determined by how much it paid for the NPLs — which it bought in the secondary market — and the cost of the credit enhancement on the bond. Roughly 19% of the loan pool has been modified, according to DBRS.

The Department of Housing and Urban Development might use the newly implemented good faith estimate disclosure as a way to cap origination fees on Federal Housing Administration loans. All lender origination fees — including yield spread premiums — are captured in 'Block 1' of the GFE. It's unclear what the cap might be, but HUD deputy assistant secretary Vicki Bott, who is in charge of FHA's single-family program, told attendees of a National Association of Mortgage Brokers conference that the issue is on the table. "We are actually looking at capping total Block 1 fees," Ms. Bott told the group. HUD officials are looking at all origination fees charged on FHA loans. It plans to take into consideration loan size so that lenders making $40,000 loans are not penalized. In setting an origination fee limit, "we are not going to be extra conservative," Ms. Bott told the brokers.

Fitch Ratings has downgraded 393 bonds in 254 residential mortgage-backed securities transactions it was reviewing to "D," indicating that the bonds have incurred principal writedowns. Eighty-five of the downgraded bonds were from transactions originally said to have alternative-A credit, 80 were from deals originally considered to be prime credit transactions and 77 were from transactions originally categorized as subprime credit. The remaining 12 bonds were said to come from "other" transaction types. All the downgraded bonds were previously rated "CC" or "C," which indicated defaults were expected.

RealEC Technologies Inc. has launched new income verification services to its RealEC Collaborative Partner Network, the RealEC Exchange. The income verification suite, provided by Lender Processing Services' Applied Analytics group, enables lenders to validate a borrower's identity and verify the accuracy of income information provided during the application process. The borrower's income is confirmed directly with the Internal Revenue Service by uploading the signed IRS 4506-T form electronically through the RealEC interface. LPS Applied Analytics then securely delivers a report from the IRS.

PeoplesBank has given its members access for mobile banking and payment services through the iPhone, courtesy of technology provided by Online Resources Corp. The Massachusetts-based $1.5 billion asset bank is now one of fewer than 50 U.S. financial institutions that currently offer the iPhone application through the App Store or iTunes. PeoplesBank has used Online Resources' full suite of retail and business Internet banking and bill payment services since 1999. An extension of these online services, the new iPhone application allows users to view account balances, transaction history, schedule same day transfers, pay bills, and send and receive secure in-session messages. PeoplesBank customers register online for mobile access and download the iPhone application, which also works on iPad and iPod touch devices.

After months of planning, Fannie Mae on Monday finally unveiled new details on its warehouse lending pilot, a $1 billion effort designed to provide additional funding to nonbank residential lenders. Its partner in the pilot is Natty Mac of Florida, a warehouse lender owned by Guggenheim Partners LLC. The program will provide credit lines for 10 to 12 lenders in 2010, the GSE said. "In this market, lenders who rely on warehouse funding are struggling to sell their loans and replenish their funds in a timely way," said Fannie Mae CEO and president Michael Williams. "We are taking action now to help fill the gap by providing a billion dollars of critical liquidity targeted at smaller lenders across the country." Fannie would not identify the lenders that will be on the receiving end of the credit lines. National Mortgage News Online reported last week that the pilot was on the verge of being launched.

The Department of Housing and Urban Development is preparing to issue a final rule soon that will give mortgage bankers additional time to adjust to coming higher net worth requirements. The final rule will "ensure there is a chance to ramp up to the new requirements," said Federal Housing Administration assistant secretary Vicki Bott. HUD is seeking to increase its minimum net worth requirement for FHA lenders to $2.5 million from the current $250,000. The phase-in period for the higher amount was originally proposed at three years, but could be lengthened. Ms. Bott made her comments on Monday at a legislative conference sponsored by the National Association of Mortgage Brokers. She cautioned that changes to the final rule are "not substantially" different from what appears in the proposed rule. No other details were available at press time. Ms. Bott is encouraging brokers to send in their FHA audits as early as possible this spring. FHA still plans to move forward with a plan to have actual funders police brokers as opposed to having brokers register and be approved by HUD. But this change will hot happen until early 2011.

A la mode, Oklahoma City, has released "The Appraisal Fee Reference," a monthly guide to what independent appraisers charge nationwide. The software vendor/publisher says the AFR will help lenders/servicers with compliance issues especially in regard to new Federal Housing Administration appraisal guidelines. FHA now requires lenders to ensure that appraisers are paid reasonable and customary fees, independent of what might be added on by an appraisal management company. The AFR provides the median appraisal fees for each of the 3,221 counties in the 50 states, the District of Columbia, Puerto Rico and Guam.

Associated Banc-Corp., Green Bay, Wis., is working on a plan to expand its warehouse lending platform with a target date of midyear, according to executives familiar with the matter. "Right now they're hiring people and getting the systems in place," said one source who has been briefed on the situation. However, advisors caution that the commercial bank's strategy is to only provide credit to nonbanks that operate in Associated's bank footprint in Wisconsin, Illinois and Minnesota. (For the full story see the paper edition of National Mortgage News.)

Despite the dimming prospects for the creation of an independent Consumer Financial Protection Agency, TARP watchdog Elizabeth Warren isn't ready to consider alternatives. "Right now there is no Plan B," Ms. Warren, the chairman of the Troubled Asset Relief Program's Congressional Oversight Panel, said in response to a reporter's question on a conference call. "Right now all the chips are on the table with the Consumer Financial Protection Agency." If the CFPA becomes reality it would oversee mortgages, credit cards and other types of consumer debt, taking certain oversight functions away from federal banking regulators. The conference call was organized by the U.S. Public Interest Research Group ahead of a Monday compliance deadline for the Credit Card Accountability, Responsibility and Disclosure Act.

The benchmark 10-year Treasury yield rose above 3.8% Friday morning and stayed there into the early afternoon, suggesting possible upward pressure on mortgage rates. Late Thursday the Federal Reserve surprised the markets by raising the discount rate it charges its member banks, citing improvement in financial market conditions. However, the Fed said, "The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was." The 10-year has been as low as 3.6% this month but has been on average closer to 3.7% recently.

The delivery of certain coupons within the "TBA" mortgage-backed securities market were disrupted (or failed) in the wake of massive loan buyout plans unveiled by Fannie Mae and Freddie Mac last week. These settlements are expected to be resolved soon, according to Credit Suisse researchers. The "fails," which represent situations in which a promised amount of securities cannot be delivered by the settlement date, have been seen in to-be-announced 5% and 5.5% MBS coupons. These higher premium coupons are prioritized in the buyout plans. Credit Suisse researchers said in a report accompanying an investor call that they expect fails should move toward resolution as investors deliver more of the needed pools going forward. They see the buyouts of delinquent loans as ultimately a positive for the agency MBS market as they remove prepayment uncertainty, among other things. That uncertainty is removed almost entirely in Freddie Mac securities due to its "one [month] and done" buyout plan. Fannie's multimonth buyout plan presents opportunities for short-term trades in those securities, said Mahesh Swaminathan, director and head of residential mortgage-backed securities for CS.

The nation's GSE regulator says Fannie Mae and Freddie Mac will not provide their traditional support for the mortgage-backed securities market when the Federal Reserve stops purchasing agency MBS at the end of March. The government-sponsored enterprises are already obligated to purchase up to $200 billion in delinquent loans out of their own MBS, according to GSE regulator Edward DeMarco. "Given the size of the enterprises' current outstanding retained portfolios, and the potential volume of delinquent mortgages to be purchased out of guaranteed mortgage-backed security pools, it is my expectation that any net additions to their retained mortgage portfolios would be related to this activity," Mr. DeMarco said. The acting director of the Federal Housing Finance Agency spoke at a Women in Housing and Finance luncheon on Thursday. He stressed that FHFA is "committed to the principle of reducing" the GSEs' retained portfolios. On Thursday, a Freddie economist said Fannie and Freddie have room in their portfolios to buy MBS if private investors don't return to the market. FHFA declined to comment on the economist's remarks. Mr. DeMarco told the WHF luncheon that the Fed's exit from the MBS market will be smooth. "I expect that other private parties will begin to invest in new enterprise mortgage-backed securities as the Federal Reserve gradually withdraws its purchase activity," he said. Since December 2008, the Federal Reserve has purchased nearly $1.2 trillion in Fannie, Freddie and Ginnie Mae MBS. The Fed has $55.1 billion remaining of its $1.25 trillion commitment to support the MBS market.

The FHA's nearly forgotten Hope for Homeowners program may get a jump-start now that Joel Harrison of Banker's Portfolio has lined up an investor willing to make a multibillion-dollar bet on underwater mortgages. The H4H program turns conforming Fannie Mae and Freddie Mac loans that are "underwater" into new Federal Housing Administration-backed mortgages. Mr. Harrison said the investor — who he refused to identify — is willing to buy Ginnie Mae II H4H mortgage-backed securities. He hopes his Irvine, Calif., firm can deliver $25 billion to $50 billion in H4H loans before the congressionally approved refinancing program sunsets in September 2011. "We are really open to mortgage investors and asset managers contacting us," he said. Mr. Harrison said he has arrangements with several originating servicers to refinance the loans. Under the program, underwater mortgages must be written down to a 96.5% loan-to-value ratio based on a current appraisal with any subordinated liens being extinguished. (The Department of Housing and Urban Development is authorized to pay incentives to second-lien holders for releasing their liens.) Mr. Harrison started his shop two years ago and he believes mortgage holders are ready to accept such writedowns. "A H4H refinancing can be completed in 45 days with a 15% to 20% higher return than going through the foreclosure process, which can take 8-10 months," he said.

American homeowners are overly cynical about where their homes' value moved in the fourth quarter 2009, according to the latest Zillow Homeowner Confidence Survey. The survey gave a Zillow Home Value Misconception Index of -2; zero is when homeowners' perceptions and reality are equal. The index is in negative territory because only 20% of homeowners said their property value increased in 2009; the reality was 28% of homes increased in value last year. This is the first time the index has been negative and the closest it has been to zero since it was introduced in the second quarter of 2008. About half the respondents believe their homes lost value last year (in reality it was 65%) while 30% said the value said the same (in reality, 7%). Stan Humphries, chief economist at Zillow, said "Given recent news about the stabilization of home values in some markets, I can see why homeowners are so optimistic. However, home values in many markets are still under substantial downward pressure from high levels of foreclosures and we don't believe we'll see a definitive bottom nationally until the second quarter of this year. We're not out of the woods yet."

The average rate for a 30-year fixed rate mortgage remained below 5% and crept a little lower in the most recent week, according to the most recent Freddie Mac Primary Mortgage Market Survey. The average for the 30-year FRM during the week ended Feb. 18 was 4.93%, down from 4.97% the week previous and 5.04% a year ago. "Mortgage rates eased for the second week, while economic data releases suggest that the housing market may be in a slow state of recovery," said Frank Nothaft, Freddie Mac's vice president and chief economist. The average 15-year FRM rate was 4.33%, down from 4.34% the previous week and 4.68% a year ago. The average rate for five-year Treasury-indexed hybrid adjustable rate mortgages was 4.12%, down from 4.19% the previous week and 5.04% a year ago. The average one-year Treasury ARM rate was 4.23%, down from 4.33% a week ago and 4.80% a year ago. Average points were 0.7 for 30-year FRMs, 0.6 for 15-year FRMs and one-year Treasury ARMs, but 0.5 for five-year Treasury hybrid ARMs.

In the third quarter of 2009, Stewart Information Services Corp., Houston, reported that its title insurance operations had regained profitability. Now for the fourth quarter 2009, the entire company has become profitable, with net income of $31 million, compared with a loss of $164 million one year prior. However, for the full year 2009, Stewart lost $51 million, vastly improved over the 2008 loss of $248 million. Included in the fourth quarter net income was a $23.5 million income tax benefit. Stewart also recorded fourth quarter gains of $12.1 million on the sale of investment securities; the sale proceeds were reinvested in similar securities. Title losses for the fourth quarter 2009 were 8.8% of title revenues and included only one defalcation. For the full year, title losses were 7.6% of title revenues, vs. 7.1% in 2008. Stewart cited American Land Title Association data which showed its market share grew from 11.7% for 2007 to 14.7% in the third quarter 2009. As for this year's outlook, Malcolm S. Morris, chairman and co-chief executive, commented "We believe there remains a very challenging market in 2010, and that while sales of both new and existing homes will likely improve compared to 2009, residential refinance volumes are forecast to retreat. Commercial sales and refinance activity will improve in 2010 compared to 2009, although much of it is likely to be distressed driven."

Essent Guaranty, the upstart mortgage insurer, has received approvals to write coverage for mortgages purchased by Fannie Mae and Freddie Mac, and hopes to issue its first MI policy early in the second quarter. Obtaining GSE approvals is essential for any new mortgage vendor because the two, today, account for roughly 70% of all originations. The MI industry currently boasts six active firms that write new policies. Triad Guaranty of Winston-Salem is in liquidation mode and recently sold its operating platform to Essent. One MI veteran, requesting his name not be used, called Essent's GSE approvals "a good development for all of us," adding that, "It shows this industry can attract fresh capital." Few MIs are earning money because of their "legacy" coverage, but observers note that Essent will have no such issues to deal with. Essent's management team includes former top executives from Radian Guaranty as well as Fannie Mae. National Mortgage News broke the story about the approvals Wednesday afternoon.

California now has the highest risk of mortgage fraud with an index value of 222, according to a report from Interthinx. Nevada, which had the highest index for the previous five quarters, drops to second place with an index of 220, and is closely followed by Arizona with an index of 211, according to the Mortgage Fraud Risk Report for the fourth quarter of 2009. Florida remains in fourth place at 179, while Colorado is fifth at 153. The occupancy fraud risk index rose 16% since last quarter, the first significant increase in the index since the fourth quarter of 2006. The magnitude of the quarter-on-quarter increase suggests that occupancy fraud risk will be a serious issue going forward, as continuing price declines and get-rich-quick schemes lure investors back into the market and as builders face continuing difficulty in moving unsold inventory. Despite a 4% quarter-on-quarter decrease, the property valuation fraud risk index is up 40% over last year and up more than 100% from two years ago. Schemes involving short sales, real estate owned inventories, wholesale flipping, and refinancing by borrowers whose equity has been impaired by falling real estate values continue to drive this index. Interthinx analysts expect lenders to focus more closely on fraud risk mitigation as they work to emerge from the downturn. This will help guard against the potential for fraud as a large number of adjustable rate mortgage loans, especially option adjustable rate mortgages with negative amortization features which reset between now and the first quarter of 2012.