Originations

The production of new houses in California continued to slide in November, practically assuring that the state will record its lowest number of starts ever. According to the California Industry Research Board, builders pulled just 2,540 permits in November, down 12% from October and just about the same as the number of permits issued in November a year ago. Through the first 11 months of the year, 32,558 permits were issued, a 46% decline from the same period in 2008, when 60,304 permits were issued. CBIA expects the year to end with a total of just 35,600 starts, down significantly from 60,962 permits in 2008, which previously held the record for the lowest amount of new home production. "We're on track to set another record for production this year, but it's not a record anyone is happy about," said Liz Snow, president of the California Building Industry Association. So far this year, production breaks down like this: single-family permits, down 28% and multifamily, off 66%. For November, single-family permits totaled 1,710, down 20% from October but up 18% from a year ago. Permits were issued for 830 multifamily units in the month, up 9% from October but down 74% from last November.

Nearly 40% of homebuyers are using Federal Housing Administration financing, according to a November survey of real estate agents. The monthly survey by the National Association of Realtors also found that first-time homebuyers are responsible for 50% of all sales. "The FHA helps provide affordable mortgage financing to homeowners, particularly first-time homebuyers who are so important in drawing down inventory to help stabilize the current housing market," said NAR president Vicki Cox Golder. The latest government data show that FHA endorsed 92,900 purchase mortgages in November and 83% of the borrowers are first-time buyers. The NAR survey also tracks distressed sales and agents reported that foreclosure and short sales made up 33% of home sales last month. Investors and first-time buyers are "competing" for foreclosed properties, NAR said. "Realtors report that many buyers have pricing expectations that treat every property as if it were in foreclosure."

The Federal Housing Administration has tightened its guidelines on short sales so that borrowers who defaulted on their previous mortgages can't get a new FHA-insured loan. The new guidance is designed to prevent borrowers who want to take advantage of the decline in house prices to buy a new home at a reduced price using an FHA loan for doing so. "Borrowers in default on their mortgage at the time of a short sale (or preforeclosure sale) are not eligible for a new FHA-insured mortgage for three years," FHA says in a mortgagee letter. The new policy has been causing problems for some lenders with loans in the pipeline, according to Bud Carter, an FHA consultant with Potomac Partners in Washington. In general, FHA will not approve loans if the borrower has defaulted within the past three years. However, FHA never provided specific instructions on short sales, Mr. Carter said, so lenders were dealing with this issue on a "case-by-case basis." Mortgagee Letter 09-52 also addresses cases where a lender takes a principal writedown and refinances the borrower into an FHA-insured mortgage. The agency clarifies that the borrower has to be current on all their payments to qualify for an FHA refinancing.

The average rate for a 30-year fixed-rate mortgage rose above 5% during the week ended Dec. 24, according to Freddie Mac. "Although interest rates for 30-year fixed-rate mortgages are above 5% this week for the first time since the end of October, they are still around 0.5 percentage points below this year's peak set in mid-June," said Frank Nothaft, vice president and chief economist at Freddie Mac. Rates also remain ahead of year-ago levels, although in the case of the 30-year it is not by much. At 5.05%, the average 30-year rate is up slightly from the previous week's 4.94% and down — but only slightly — from 5.14% a year ago. The average rate for a 15-year FRM during the week ended Dec. 24 was 4.45%, up from 4.38% the previous week but down from 4.91% a year ago. The average rate for a five-year Treasury-indexed adjustable-rate mortgage during the week ended Dec. 24 was 4.4%, up from 4.37% the previous week but down from 5.49% a year ago. The average rate for a one-year, Treasury-indexed ARM during the week ended Dec. 24 was 4.38%, up from 4.34% the previous week but down from 4.95% a year ago. Average points were 0.7 for 30-year FRMs and 0.6 for all other aforementioned loan product types.

The GSE regulator and the Treasury Department have approved $6 million pay packages for the chief executive officers of Fannie Mae and Freddie Mac. On top of a base salary of $900,000, the CEOs are targeted to receive $3.1 million in deferred pay and $2 million in performance incentives in 2009 and 2010. Both of the CEOs are new this year. Michael Williams was Fannie's chief operating officer before his July promotion to be the government-sponsored enterprise's new president and CEO in April. Mutual fund executive Charles Haldeman was appointed Freddie's CEO in July. Compensation for 2009 will be prorated and all compensation is in cash. (The GSEs were placed in conservatorships in September 2008 and they cannot issue stock.) At the beginning of 2008, former Freddie CEO Richard Syron was targeted to receive $15.2 million in compensation. Former Fannie CEO Daniel Mudd received $12.2 million in compensation in 2007, including $9 million in stock. Under the new compensation program, the second highest paid executives are Fannie's chief financial officer David Johnson ($3.5 million) and Freddie's chief operating officer Bruce Witherell ($4.5 million). Except for CEOs, CFOs and COOs, the base salaries for all other GSE executives cannot exceed $500,000 a year, according to the Federal Housing Finance Board. "On average, the total compensation for executive officers at the two enterprises for 2009 is down 40% from pre-conservatorship levels," FHFA said.

Third-party and retail lender SunTrust Mortgage Inc.'s servicer quality rating of SQ2+ as a primary servicer of prime residential mortgages has been removed from watch for a possible downgrade. The move follows improvements in its call center and incentive compensation scorecard that resulted in Moody's upgrading its assessment of the company's loss mitigation abilities to above average from average. "Since the prior review, the company increased outbound collection call volumes and extended collection call center hours," Moody's said. The rating agency also said that it views SunTrust's foreclosure and real estate owned timeline management abilities to be above average. It views the company's servicing stability as average. The senior unsecured debt rating for SunTrust Mortgage's parent company SunTrust Banks Inc. has a negative outlook. Moody's rates servicers somewhere on a scale between SQ1 and SQ5 on which servicers rated SQ1 are considered strong and those rated SQ5 are considered weak, with plus or minus signs indicating interim points along that scale.

The inventory of unsold existing single-family houses in California is now down to a manageable 4.5 months, according to the monthly roundup of sales activity by the state's Realtor association. In November a year ago, there was a 7.1 month's supply of housing awaiting buyers. "With sales bottoming out more than two years ago, and the median home price reaching its trough in February 2009, California remains ahead of the nation in market recovery," said Leslie Appleton-Young, chief economist at the California Association of Realtors. According to CAR's latest report, sales were up 4.7% in November from the same month a year ago to a seasonally adjusted rate of 536,720 units, while the median price increased 5.8%, from $287,880 in November 2008 to $304,520. On a month-by-month basis, closed sales in November were actually down 4.6% from October, but the November median price was up 2.4% from $297,500 the month before. According to CAR president Steve Goddard, rookies continue to drive the California market because of the $8,000 federal first-time buyer tax credit, while efforts by lenders and the government to assist owners at risk of foreclosure have cut into the number of properties on the market. CAR's price and sales data for detached homes are generated from a survey of more than 90 Realtor associations throughout the state. Data for condominiums are based on a survey of more than 60 state groups.

Home prices rose 0.6% in October and rebounded from a 0.4% decline in September, according to a house price index compiled by the Federal Housing Finance Agency. The index, however, only reflects homes funded by Fannie Mae and Freddie Mac loans. Regionally, the FHFA HPI registered a 3.7% jump in the Pacific states, which includes California. The Mid-Atlantic states ranked second with a 1.8% increase in house prices. The South-Atlantic region, which runs from Maryland to Florida, experienced the worst monthly performance with a 1.6% price decline in prices. FHFA bases its house price index on Fannie Mae and Freddie purchase mortgage transactions. Overall, U.S. prices are down 1.9% since October 2008, according to the regulator's HPI. The FHFA index is 10.8% below the April 2007 peak in prices.

Standard & Poor's has downgraded the ratings on five mortgage insurance companies, saying industry losses have exceeded its prior expectations and the recession has had a deeper impact on their portfolios than expected S&P said claims payments remain below expectations as a result of the backlog of foreclosures and the moratoria implemented earlier in the year. However, the report notes "the lower-risk books of business within the mortgage sector (such as those with higher FICO scores or lower loan-to-value ratios) have been and will be more adversely affected than we had anticipated and U.S. mortgage insurers' losses will continue to be greater than previously expected overall." The company hardest hit by the downgrade was Republic Mortgage Insurance Co., whose rating was dropped from "A-" to "BBB-". Ironically, S&P said RMIC received a two-notch uplift, "reflecting that company's strategic importance to Old Republic International (RMIC's parent company) and management's requirement that the mortgage insurance group capital be self sustaining." United Guaranty was dropped from "BBB+" to "BBB", with S&P giving it "a four-notch benefit because of a net-worth-maintenance agreement from its ultimate parent, American International Group Inc., and a reinsurance treaty from a higher-rated affiliate." Genworth was dropped from "BBB+" to "BBB-" with one notch of benefit because of the potential for support from its parent company. PMI and Radian were cut from "BB-" to "B+". Back in October, MGIC was downgraded to "B+". S&P said it is still reviewing CMG Mortgage Insurance Co. and California Housing Loan Insurance Fund.

A pair of Bank of America subsidiaries, Countrywide Home Loans Inc., and BAC Home Loans Servicing LP, is suing Mortgage Guaranty Insurance Corp. seeking a declaratory judgment against the mortgage insurer. The complaint states MGIC is denying paying Countrywide "millions of dollars in valid mortgage insurance claims." In a Securities and Exchange Commission filing, MGIC Investment Corp. said it intends to defend the mortgage insurer against the allegations "vigorously," although it added a disclaimer stating it is unable to predict the outcome of the case or its effect on the company. Countrywide had obtained mortgage insurance on the loans in question via a flow policy. According to the court filing, MGIC is denying claims based on allegations that misrepresented information was provided by or on behalf of the borrower. Countrywide counters in the filing that MGIC is basing its decisions on "second or third-hand accounts of one-sided, self-serving and/or unsubstantiated hearsay and would not be admissible." The court filing does state a substantial number of loans involved are stated income loans and MGIC was aware of that fact. The filing said MGIC did not demand income information for all loans, not just the stated income loans, which Countrywide submitted for insurance underwriting. The suit also alleges MGIC is denying claims payments based on faulty review appraisals the mortgage insurer is conducting.

The Federal Reserve Board and the Federal Trade Commission have issued a final rule that requires lenders to disclose their use of risk-based pricing along with a notice that tells consumers they will not get the best deal because of their credit score. Starting in January 2011, lenders must provide mortgage applicants with a risk-based pricing notice if they will receive less favorable terms than 40% of the lender's other customers. The final rule has two tests, including a 40%/60% test, for determining when consumers should get a RBP notice. The Fair Credit Reporting Act rule, mandated by Congress in 2003, provides some exceptions to the RBP notice requirement, including one for single-family lenders that provide applicants with their credit score. Along with the credit score, the lender must provide a notice that "describes the creditor's use of credit scores to set the terms of credit," the final rule says.

Higher to stable mortgage interest rates have finally had a negative effect on loan application volume said the Mortgage Bankers Association in its Weekly Mortgage Applications Survey for the week ending Dec. 18. The Market Composite Index, a measure of mortgage loan application volume, decreased 10.7% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 10.9% compared with the previous week. The Refinance Index decreased 10.1% from the previous week and the seasonally adjusted Purchase Index fell 11.6% from one week earlier. The share of refinance activity increased to 75.9% of total applications, up from 75.2% the previous week. The adjustable-rate mortgage share of activity decreased to 3.8% from 4.1%. The average contract interest rate for 30-year fixed-rate mortgages remained at 4.92% for the second consecutive week (after increasing the previous two weeks), with points increasing to 1.23 from 1.08 (including the origination fee) for loans with an 80% percent loan-to-value ratio, the association reported. The average contract interest rate for 15-year FRMs increased a single basis point over the previous week to 4.33%. For one-year adjustable-rate loans, the rate remained at 6.52% for the second consecutive week. The organization said its offices will be closed next week and the next time it will be releasing survey results will be on Jan. 6, 2010.

New home sales plunged 11.3% in November from the previous month, but some experts are brushing it off as an aberration due to the expiring of the first-time homebuyer tax credit. Weiss Research real estate analyst Mike Larson noted that November sales fell to the lowest level in seven months. "Some giveback was to be expected given the feared expiration of the tax credit (on Nov. 30) and the pull-forward of some demand." But Congress has extended the tax credit and expanded it to repeat buyers, "I suspect sales going forward will find support," Mr. Larson said. The U.S. Census Bureau reported that sales of new single-family homes fell to a 355,000 seasonally adjusted annual rate in November from 400,000 in October. The bureau also revised downward the sales numbers for the previous three months. IHS Global Insight economist Patrick Newport noted that the inventory of unsold new homes has fallen for 31 consecutive months. And the tax credit has focused buyers on purchasing completed homes and less expensive homes. Now there are only 101,000 completed units for sale. "The decline in inventories implies that builders, at some point soon, will need to ramp up housing starts, or they will lose sales," Mr. Newport said.

Union Bank of San Diego, which derives 60% of its originations from wholesale production, is looking to increase its broker network next year, according to a top official at the company. Craig Cole, senior vice president and division manager for Union, said the lender currently has 80 approved brokers that it uses. "We may increase that to more than 100 next year," he said in an interview with National Mortgage News. In the third quarter, Union Bank ranked 14th nationwide among wholesalers, according to figures compiled by the Quarterly Data Report. Mr. Cole said his institution has had no problems with the quality of its broker-sourced loans, saying "they're as clean as a whistle." Union is a top ranked jumbo lender as well.

The multifamily sector is taking a beating and experiencing record vacancy rates due to high unemployment and low household formation, according to Freddie Mac. Freddie Mac and its sister company, Fannie Mae, are major investors in multifamily loans, and could experience greater delinquencies if the situation persists. High jobless rates among teenagers (27%) and 20-24-year olds is forcing many to postpone household formation or move back with family and friends, according to Freddie Mac chief economist Frank Nothaft. In addition, the vacancy rates have moved up as federal tax credits for first-time homebuyers have encouraged renters to become homeowners. A Census Bureau report shows the vacancy rate on buildings with ten or more apartments is 13.5% as of Sept. 30. For apartments built since the start of 2000, the vacancy rate is 23.2%, "reflecting in part the slow rental rate of newly built dwellings," Mr. Nothaft says in a paper on housing trends. "As a result of rising vacancies and lack of opportunity to increase rents," he said, multifamily property values are falling and delinquency rates on multifamily mortgages are rising. The Freddie economist points out that the National Council of Real Estate Fiduciaries has reported that multifamily property values have declined 29% from their mid-2008 peak. The Federal Deposit Insurance Corp. reported that the number of multifamily loans 90 days for more past due has doubled since last year and hit 3.6% in the third quarter — the highest since 1993.

The steepness of the curve formed by the range of yields between two-year and 10-year Treasuries has reached never-before-seen levels -- a good sign for mortgage originators whose profits are derived from the difference between their cost of funds and the residential loans they originate. The bad news for lenders is that rising mortgage rates could cause application volume to slow even though their cost of funds will stay cheap. The steep yield curve could be conducive to sales of "long" paper on collateralized mortgage obligations, "but sometimes if the market is selling off rapidly as it has been this week" investors might wait for it to stabilize, said Art Frank, director of mortgage-backed securities research at Deutsche Bank Securities. Over the course of the past week the 10-year yield has been as low as 3.50% but as of late Tuesday morning it was above 3.70%.

Lenders originated just $7.8 billion in second liens in the third quarter, a 56% decline from the same period last year, according to new figures compiled by National Mortgage News and the Alternative Products Quarterly Data Report. The weak showing for second lien production is in contrast to all residential originations which increased by 31% in the third quarter to $443 billion. Many non-depository mortgage banking firms have stopped originating seconds entirely while bank lenders have severely tightened underwriting standards on both closed- and open-ended lines. Also, many seconds were once part of 80-10-10 and similar loan structures, a product that is now near-extinct. Wells Fargo & Co., San Francisco, ranked first among all second lien lenders in third quarter with $1.9 billion in fundings. Its second lien originations fell 24% year-over-year. Every lender among the top 10 ranked funders showed a decline with drop-offs ranging from 24% (Wells) to 80% (Chase).

A.M. Best Co., Oldwick, N.J., has given Stewart Title Group a financial strength rating of "B++(Good)" and an issuer credit rating of "bbb+," stating the Houston-based global title insurer's ratings reflect its adequate capitalization along with its moderate underwriting leverage. Parent company Stewart Information Services Corp. received an ICR of "bb+." In its statement, Best added that in spite of the 35% decline in statutory surplus at the company, this is still "relatively moderate compared to that of the title insurance industry as a whole." The rating agency said it expects the statutory surplus to increase at the end of this year as Stewart Title Guaranty Co., the lead underwriting unit, retires short-term debt through the use of longer term debt issued by the parent company in the form of convertible senior notes. Stewart's underwriting results in 2009 have been affected by reserve strengthening because of an increase in claims from prior policy years, along with large title claims, some resulting from agency defalcations. Best noted that Stewart is not only the third largest underwriter of title insurance with a 14% market share in the U.S., it does business in approximately 40 countries, enhancing its geographic diversification.

Specialized Portfolio Servicing LLC, Salt Lake City, Utah, has had its primary servicer ratings for alt-A, subprime and home equity lines of credit upgraded by Fitch Ratings, New York, from "RPS3+" to "RPS2-." The company's residential special servicer rating and residential primary specialty servicer rating for second lien products received the same upgrade. Fitch cited the company's seasoned management team, technology enhancements and improvements in customer service and default management, which have increased its ability to proactively target problem accounts. The special servicer rating reflects Specialized Portfolio Servicing's "ability to liquidate nonperforming assets utilizing its focused default management expertise." These ratings also reflect the company's ability to attract, hire and retain key employees. It also reflects the ratings of its parent company, Shinsei Bank Ltd., which are "BBB/F2" with a negative outlook. Specialized Portfolio Servicing has a portfolio with an unpaid principal balance of $9.35 billion, of which 2.3% is special servicing. Approximately 37% of the loans are first lien and 63% second lien. By product it includes 20% subprime loans, 28% closed end seconds, 8% HELOCs and 6% alt-A.

Fitch Ratings has placed $20.6 billion in bonds from 33 floating-rate U.S. CMBS on Rating Watch Negative. The rating agency also said it has assigned negative rating outlooks to 22 classes totaling $1.1 billion that currently have fairly high AAA and AA+ investment grade ratings. "The Rating Watch Negative placements are the result of the significant stress on cash flow experienced by floating-rate loans in 2009 and Fitch Ratings' expectation that cash flows will continue to be stressed for the foreseeable future," Fitch said. "Floating-rate loans are transitional in nature and more susceptible to declining market conditions."