Originations

Here are some thoughts on turning around a trend of declining income.

Moody's Investors Service has placed the ratings of 262 residential mortgage resecuritization tranches on watch for possible downgrade. Combined, the resecuritized residential mortgage-backed securities affected have a current outstanding balance of $11 billion. "Increased losses on the underlying certificates are ... likely to affect the principal recovery on the junior resecuritization bonds and probably the senior resecuritization bonds as well," the rating agency said. The resecuritization is backed by alternative-A credit or supbrime collateral RMBS issued from 2005 through 2008.

A temporary tax break for some United Kingdom homebuyers likely contributed to net U.K. mortgage lending exceeding expectations for 2009, but it was still the slowest year since at least 1987. Net U.K. lending for 2009 totaled £11.5 billion ($18.3 billion), above the £8 billion ($12.7 billion) the CML had expected. This was seen as largely due to a relatively strong purchase market in the second half of the year that the tax break likely contributed to as well as a relatively weak U.K. refinance market. Gross lending for the year in the United Kingdom, at £13.4 billion ($21.3 billion), came in much closer to the CML's forecast (£13.5 billion) than the net lending figure for the period. "These figures confirm that the mortgage market ended 2009 in much better shape than it started, but it looks like a slow haul back to meaningful levels of activity," said CML economist Paul Samter. He added that the apparent rush to close in 2009 ahead of the deadline for the tax break could mean the market has a couple of slow months ahead of it.

Covered mortgage bonds — which have yet to appear in the U.S. — trade at better prices when there is a solid legal foundation for the securities, according to a German trade group executive. "It is essential that the underlying legal framework be of high quality," said Jens Tolckmitt, executive director, association of German Pfandbrief Banks. He noted German banks were able to issue 10 billion to 14 billion euros in private covered bonds per month during the height of the financial crisis — September 2008 through January 2009. Mr. Tolckmitt made his comments during a panel discussion on creating a covered bond market in the U.S. Congress is toying with the idea of passing covered bond legislation but no firm timetable is in place. Morrison & Foerster senior counsel Jerry Marlatt noted that legislation sponsored by Rep. Scott Garrett, R-N.J., would assure investors that the FDIC would not liquidate covered bond assets in the event of the issuing bank's failure. Without this legislation, investors would demand higher premiums and higher over-collateralization. "Legislation would take a lot of the expense out of issuing U.S. covered bonds," Mr. Marlatt said. Canadian banks began issuing covered bonds in 2007 without legislation, but did not face FDIC-like issues, according to David Power of the Royal Bank of Canada. Nevertheless, Canadian banks are seeking covered bond legislation, Mr. Power said.

The Eleventh Federal Home Loan District Cost of Funds Index for December recovered somewhat from the shock of Wachovia Mortgage FSB being removed from the calculation and the resulting record 84 basis point rise between October and November. The latest index, at 1.828% for December, was down nearly 27 basis points from the 2.094% reported for November. The Federal Home Loan Bank of San Francisco uses a weighted average calculation to determine COFI and the removal of Wachovia on Nov. 1, 2009 as it was merged into Wells Fargo Bank NA resulted in a major reduction in the amounts used in the formula. But the total average funds of $37.5 billion and the total interest expense of $57.1 million used to determine December's COFI are similar to the numbers used in the November calculation of $38.5 billion and $67.2 million. COFI is computed from the actual interest expense reported for a given month by the Arizona, California and Nevada eligible savings institutions members of the FHLB-SF. The index was designed to be a lagging indicator and thus less susceptible to wild swings. But a disclaimer issued by FHLB-SF said if a reporting member is removed from the calculation, depending on how it impacts total average funds and total interest expense, the effect could be significant.

PNC Financial Services, Pittsburgh, has extended many of the employment agreements with the old National City warehouse group until June 1, according to industry officials familiar with the matter. As reported by National Mortgage News last month, National City Warehouse (under PNC) is extending warehouse lines to June, not just March. There is still interest in selling the unit to a third-party firm, but PNC officials, to date, have declined to discuss the matter.

Several influential issuers are hoping to bring a new-issue residential mortgage securitization to market this year, according to one executive attending the American Securitization Forum conference. "Every major issuer we've spoken to has a goal of doing a deal this year [and] with one or two exceptions, they are all looking at a prime [jumbo] deal," said Alex Santos, president of predictive analytics and advisory firm Digital Risk LLC, Maitland, Fla. In regard to timing, he added that, "The most ambitious goal I have heard is the first quarter." While pricing remains an obstacle, discussions about the possibility have become more serious, said Mr. Santos, whose firm's offerings include contract underwriting. Among the reasons why is that "they hear the loans are better than they were," he said. But Digital Risk has some mixed findings when it comes to whether loans really have improved. Credit quality, as far as loan-to-value and debt-to-income ratios, is better, Mr. Santos said. But when it comes to cutting down on procedural mistakes, underwriting "hasn't improved as much as people expect and hope," he said.

The nation's private mortgage insurers ended one of the worst years ever for the business with a whimper as December 2009 saw the smallest number of applications received for the preceding 12 months. The $5.1 billion of primary new insurance written (all but $9.5 million through the traditional channel) brought the total for 2009 to approximately $81 billion, according to the Mortgage Insurance Cos. of America. For the month, mortgage insurers received just 26,284 in applications. In December 2008, the dollar volume of primary new insurance written was $7.2 billion and there were 61,597 new applications received. Primary insurance in force as of Dec. 31, 2009, is $863.4 billion, down from $952.2 billion one year prior, while primary risk-in-force is $200.7 billion, compared with $219.0 billion during the same period. New pool risk written was $10.2 billion; pool risk-in-force has declined from $8.7 billion at the end of 2008 to $7.7 billion one year later. December's cure default ratio was 64.5%, with 61,032 cures and 94,651 defaults. For last year, there were no months where there were more cures than defaults.

Refinancings at Fannie Mae and Freddie Mac surged 37% in the month of December to the highest level since August, according to the GSE regulator. The government sponsored enterprises purchased nearly 297,000 refinanced loans from lenders in December, up from 217,100 in November. "Total refinance volume rose in December in response to a gradual June to November decline in rates," the Federal Housing Finance Agency said in a report. December's surge includes refinancings of 33,347 borrowers with Fannie and Freddie loans under a special program for homeowners with loan-to-value ratios between 80% and 105%. Launched April 1, the Home Affordable Refinancing Program has helped 188,250 difficult-to-refinance homeowners take advantage of historically low mortgage rates in 2009 and lower their monthly payments. HARP does not require the purchase mortgage insurance. On October 1, FHFA expanded HARP to refinance underwater borrowers with LTVs greater that 105% and up to 125%. During the fourth quarter, the GSEs refinanced 1,900 of these higher LTV loans, including 1,100 in December.

The Federal Housing Administration is forecasting a dropoff in single-family originations during the current 2010 fiscal year and FY 2011 along with an increase in claims and foreclosures. In FY 2009, which ended Sept. 30, FHA lenders originated $330.5 billion in single-family loans, not counting reverse mortgages. FHA expects a 9% decline in originations in FY 2010 to $300 billion followed by an 18% decline in FY 2011 to $246 billion. The President's FY 2011 budget proposal also projects a jump in claim payments to lenders due to defaults on FHA guaranteed single-family loans. In FY 2009, FHA lenders paid $8.5 billion on defaulted loans. Budget estimates show these payments could jump to $15.7 billion in FY 2010 and $19.7 billion in FY 2011. The FHA mortgage insurance fund managed to stay in the black in FY 2009 by a very thin margin. Despite the jump in claims, FHA's financial performance should improve slightly in FY 2010, according to budget projections. FHA is expected to get a boost in revenues from a mortgage insurance premium increase that goes into effect this spring.

The Federal Housing Administration is seeking congressional permission to raise the annual premium on FHA-single-family loans to 0.85%, up from the current 0.55% statutory limit, according to the President's fiscal year 2011 budget proposal. "If granted this statutory flexibility, FHA will lower the upfront premium to 1% and increase the annual premium from 0.50% to 0.85%," the budget document says. The discussion of FHA issues in the budget documents also indicates FHA might charge a 0.90% annual premium on low downpayment mortgages. FHA is in the process of raising the upfront premium to 2.25% this spring with the caveat that it will lower the upfront charge once Congress approves the increase in the annual premium. The budget documents also show that the FHA reverse mortgage program will need a $250 million congressional appropriation in FY 2011 to break even. The administration is proposing changes to the Home Equity Mortgage Conversion program that will raise premiums and "slightly lower loan limits."

Purchasers who intend to be owner-occupants of Fannie Mae-owned homes will receive 3.5% in closing costs or an equivalent amount in home appliances for properties listed on HomePath.com. The offer expires on May 1, 2010. The effort aims to attract to the market more qualified buyers and reduce its real estate owned inventory, Fannie Mae executives said. Therefore it is offering an additional incentive to the homebuyer federal tax credit for first-time buyers and other affordable financing options. For example HomePath Mortgage and HomePath Renovation Mortgage listings also provide a 3% down payment alternative to qualified borrowers.

President Barack Obama, in his State of the Union speech, signaled that his administration is moving toward making it easier for homeowners to refinance into affordable mortgages. "This year, we will step up refinancing so that homeowners can move into more affordable mortgages," the President said. However, Mr. Obama was a bit light on details. Some industry officials indicated it might involve changes to the Home Affordable Modification Program. Others said it could portend changes to Fannie Mae and Freddie Mac programs that refinance borrowers with loan-to-value ratios from 81% up to 125%. Liberal housing groups were disappointed by the speech because of the lack of focus on foreclosures and housing issues. "The President highlighted the need for jobs and health care reform for middle-class families," said Mike Calhoun, president of the Center for Responsible Lenders. "But Americans need relief in the housing market and stronger measures to stop preventable foreclosures." National Low Income Housing Coalition president Sheila Crowley noted that the speech was "notably lacking" in its attention to the foreclosure crisis and affordable housing crisis. "Not only are homeowners facing the loss of their homes, but low income renters are competing for housing in an ever shrinking supply of low cost rental homes," Ms. Crowley said.

Fannie Mae bought $71.86 billion of loans from its seller/servicers during December, a 67% spike from the previous month. Compared to December 2008, purchases were up 50%. Even though Fannie had a good month in terms of new business acquisitions, its serious delinquency rate on single-family loans hit a new high: 5.29% in November, more than double the rate in the same period a year earlier. The figure includes all late payments that are 30 days or more past due. Late payments on its multifamily loans rose to 0.66% from 0.25% in November 2008. Fannie's late payments lag by one month behind disclosure of its acquisitions and other data points.

State Bank of North Carolina is acquiring cross-town mortgage lender Affiliated Mortgage LLC of Raleigh for an undisclosed sum. The agreement calls for the purchase to close on or before February 12, 2010, at which time Affiliated will become a new division of the bank called North State Bank Mortgage. Ken Sykes, Affiliated's managing partner, will serve as president. "Simply put, we are in the relationship banking business," said North State president and chief executive Larry Barbour. "Being able to provide residential mortgages for our customers is a critical part of our commitment to serving them." Affiliated opened its doors in 1994 as a mortgage broker but subsequently became a mortgage banker. "The staff at Affiliated offers excellent service, and culturally our two firms are well-aligned, which is extremely important as we work together," Barbour said. Mr. Sykes noted that both entities serve same clientele.

Genworth Financial's U.S mortgage insurance unit reported a net operating loss of $74 million for the fourth quarter, a considerable improvement from the same period a year ago. The Richmond, Va.-based company attributed two thirds of its fourth quarter losses to its GSE alt-A business, which soon will be mitigated by a reduction in its coverage on those high-risk loans. Genworth executed an agreement effective Jan. 1, 2010 that will result in the cancellation of approximately 80% of the GSE alt-A bulk risk-in-force. The agreement resulted in a total claim payment of approximately $182 million in January 2010 which was already fully reserved. This will reduce the GSE Alt-A bulk RIF from $295 million to approximately $65 million in the first quarter of 2010. Flow delinquencies totaled approximately 107,500, up from approximately 100,200 and 87,600 in the third and second quarters of 2009, respectively, reflecting seasonal increases and a decline in cured delinquencies. Loss mitigation activities, including workouts, presales and policy rescissions, resulted in $290 million of savings in the quarter, bringing total 2009 savings to $847 million. This included approximately $35 million in savings from delinquent loans that were modified through HAMP. Based upon reporting from the GSEs and certain servicers, Genworth estimates that there are approximately 22,200 delinquent loans that are currently pending within HAMP, nearly double the number at the end of the third quarter 2009. In Q4 2008 Genworth's MI business lost $114 million.

Richard Shelby, the ranking Republican on the Senate Banking Committee, believes Fannie Mae and Freddie Mac eventually should be spun off by the government and privatized. However, he warned that doing so will take a lot time and money. The "GSEs are in our lap," the Alabama lawmaker told American Banker. "You know, we own them. I would like to see them cleared up and spun off, whatever, see if anybody wants them. It's going to take a lot of money. There's a lot of guarantee out there. It's not implicit; it's explicit." When asked if he was saying he wants to privatize the GSEs, Shelby confirmed he does. "That's what I'd like to see done with them, because if you create a hybrid deal like this it's never worked." The Obama administration is expected to unveil its proposal for the GSEs in its 2011 budget, which is due Monday. Today, Fannie and Freddie in their role as secondary market investors, account for almost 70% of all residential originations.

Consumers extracted just $11 billion in equity from their homes using cash-out refinancing loans in the fourth quarter, the smallest such volume in nine years, according to new figures released by Freddie Mac. "It's not free money any more," said Amy Crew Cutts, the GSE's deputy chief economist. Ms. Cutts said declining home values and a lack of "no cost refis" for consumers have severely hammered the market. "Unless you have been in the house for a long time you may not have much to take out," she said. According to research done by Freddie, cash-out refis by consumers peaked in the second quarter of 2006 when $83.6 billion in equity was taken out of homes. Since then, the amount of money stripped out of homes using refis has fallen steadily. The GSE did find one encouraging trend: in Q4 roughly 33% of borrowers using Freddie Mac loans actually lowered the principal balance on their loans.

Flagstar Bank is seeing continued growth in its warehouse lending business with the dollar volume of commitments to nonbank mortgage lenders rising 40% at year-end compared to the same period a year earlier. According to figures reported to National Mortgage News, the Michigan-based thrift had $1.5 billion in commitments at December 31, compared to $1 billion in the same period a year earlier. However, even though its committed facilities were up handsomely, actual lines outstanding did not rise all that much year-over-year: $455 million versus $441 million. Flagstar, which earlier this week raised $300 million in fresh capital, ranks among the top five warehouse lenders in the nation.

The Federal Housing Administration is expected to ask for Congressional approval to raise the annual insurance premium on its loans to at least 75 basis points and perhaps higher, according to industry officials interviewed by National Mortgage News. The exact figure will be released Monday when the President's 2011 budget is unveiled. Currently, the annual premium is capped at 55 basis points. The additional money raised would be used to bolster its reserve fund which is barely in the black. Some sources think increasing the premium to 100 basis points is a possibility but likely will not happen. "They have half-a-million in delinquencies," said one insurance executive, requesting anonymity. "They are absolutely going to hike it; it's just a matter of how much." FHA recently raised the upfront mortgage insurance premium (MIP) to 2.25%, a 50 basis point increase that becomes effective this spring. The budget document likely will include FHA's estimates on how much the premium hike will rise and a timeline for restoring the fund's capital ratio back to 2%. (At last check it was at 0.53%.) The Department of Housing and Urban Development budget also will have projections for FHA loan losses and claims in the current (2010) fiscal year and FY 2011. HUD wants Congress to enhance FHA's authority to seek indemnification from lenders for loans that go bad. Mortgage bankers are anxious about the proposal because it will increase their liability and risks of doing business with the FHA.