Originations

It is a new low point for the Eleventh Federal Home Loan Bank District Cost of Funds Index, which for September 2009 fell 14 basis points to 1.272%. The previous low was recorded in April at 1.380%. The decline in COFI has moderated in the past five months. In the period between November 2008 and April 2009, it fell 177.5 basis points. Between May and September, the index fell just 56 basis points. The COFI is computed from the actual interest expense reported for a given month by the Arizona, California, and Nevada savings institutions members of the Federal Home Loan Bank of San Francisco. That includes the cost of deposits. Deposit interest rates might be at record lows. The average secondary market rate for one-month certificates of deposits is at an all-time low for September at 0.21%, the sixth month in a row of declines. Last October, a run up in this rate peaked at 4.04%. The secondary market rate for the three-month is 0.25% and for the six-month CD is 0.36%.

September was the worst month of the year so far in terms of dollar volume of primary new insurance written for the private mortgage insurance companies. According to data gathered by the Mortgage Insurance Cos. of America, there was just $4.8 billion of primary new insurance written, compared with a revised total of $5.8 billion in August; a statement from MICA said this includes HARP originations, but the group did not break out how many. Last September MICA members wrote $8.1 billion, but this does not include figures from Radian Guaranty Inc., whose data was not included in the group's statistics until December 2008. Since that month, the industry's primary insurance in force has declined from $952.2 billion down to $892.7 billion. New pool risk written was $4.7 million for September, while pool risk in force at the end of the third quarter was $7.9 billion, up from $7.0 billion for the same period one year prior. There was an improvement in the cure/default ratio, from 57.6% in August to 64.7% for September with 59,750 cures and 92,292 defaults during the month.

The Department of Housing and Urban Development is threatening to stop Financial Mortgage USA, Honolulu, from making Federal Housing Administration reverse mortgages and allegedly taking advantage of seniors. HUD alleges that the mortgage brokerage firm "duped" seniors into using the proceeds of their FHA reverse mortgages to purchase annuities from an affiliated insurance firm. [Reverse mortgages have an annuity feature depending on the payment plan the senior chooses.] The HUD Mortgagee Review Board is "particularly concerned about one case in which the company steered an 88-year-old borrower into purchasing an annuity which did not mature until she reached her 104th birthday," the department said. The MRB has proposed to permanently withdraw Financial Mortgage USA's status as a FHA-approved lender and fine the company $97,500 for violating FHA rules. The Honolulu lender can request an administrative hearing to contest HUD's actions. Company executives could not be reached for comment.

Federal regulators have issued guidance that encourages banks to refinance or restructure commercial real estate loans despite declines in property values and rents. "The financial regulators recognize that prudent loan workouts are often in the best interest of both financial institutions and borrowers, particularly during difficult economic conditions," according to a policy statement issued by the Federal Financial Institutions Examination Council. The policy statement provides examples of prudent CRE workouts. It also stresses the importance of the borrower's willingness and capacity to repay the mortgage. The guidance tells examiners not to adversely classify prudent workouts, even in cases where the borrower is associated with an industry that is facing financial difficulties. CRE loans that are "renewed or restructured in accordance with prudent underwriting standards should not be adversely classified or criticized unless well-defined weaknesses exist that jeopardize repayment," the guidance says.

A few months ago, industry groups seemed resigned that Congress might impose a 5% risk retention requirement on mortgage securitizations, but now legislation is headed for a committee markup that pushes the "skin in the game" bar to 10% which has many concerned. "The 10% requirement is unstudied and could have a significant negative impact on mortgage finance," said Scott Talbott, a lobbyist for the Financial Services Roundtable. Mr. Talbott warned House Finance Financial Services members in his testimony that requiring lenders to retain that much credit risk would "significantly limit" their capacity to extend mortgage credit. In May, the House passed a subprime lending bill that requires lenders that sell and securitize subprime mortgages to retain 5% of the credit risk. Industry groups thought they had achieved a workable compromise. The subprime bill (H.R. 1728), specifically exempts government guaranteed mortgages and loans purchased or securitized by Fannie Mae and Freddie Mac from the credit risk retention requirement. The Senate has not taken any action on H.R. 1728. Financial Services Committee chairman Barney Frank, D-Mass., the primary author of H.R. 1728, did not include the exemptions in his regulatory reform bill to address systemic risk issues and "too big to fail" institutions. Regulators can reduce the 10% retention requirement to 5% on certain mortgages under the new bill, but no lower than 5%. "We are baffled as to why this has come back up again, since we thought it was settled in the subprime lending bill," said Glen Corso, managing director of the Community Mortgage Banking Project. Mr. Corso pointed out that the Frank bill, which has the support of the Obama administration, also imposes a credit risk retention requirement on securitizers that can be in lieu of or in addition to the lenders requirement. "I think there will certainly be a push for some exemptions," said Bert Ely, a banking consultant.

Independent mortgage banking firms saw their origination profits increase 28% to $1,358 per loan in the second quarter thanks to rising loan volumes, in particular a swell in refinancings. According to a new study by the Mortgage Bankers Association, 96% of the 292 lenders surveyed posted a pre-tax profit in 2Q compared to 85% in 1Q and just 53% in 4Q. The profit study focused on what the trade group calls "independent" mortgage bankers, a universe that includes both non-depositories and subsidiaries of banks. None of the nation's "mega" banks — Bank of America, Wells Fargo & Co., JPMorgan Chase, and Citigroup — are included in the MBA's survey, said a spokeswoman. According to figures compiled by National Mortgage News and the Quarterly Data Report, all lenders funded $583 billion in residential loans in 2Q compared to $480 billion in 1Q — a 21% increase in volume. Commenting on the results, Marina Walsh, MBA's associate vice president of industry analysis, said, "The big increase in production volume allowed lenders to spread their fixed costs over a larger number of loans, thus increasing net profits. At the same time, purchases picked up as homebuyers with good credit took advantage of low interest rates."

As the bank earnings season starts to wind down, credit rating firm DBRS said the results for the most part show a weak quarter. "Despite the improvement in financial markets and some promising signs in housing markets, DBRS still expects that mounting job losses, the weak economy and the sustained pressure of asset quality deterioration will keep bank earnings weak at least into the middle of 2010. This economic pressure is falling more heavily in some regions of the country, especially where housing markets and real estate activity collapsed and remain depressed," a report from the company said. Nonperforming loans are increasing, but at a slower pace. Like many others, the Chicago firm is projecting commercial real estate as the next hot spot. CRE portfolios have held up well except for construction loans. But higher vacancies, lower rents and depressed valuations will have an impact, as the weakness in the economy feeds through to demand for commercial space. "CRE is likely to be the weak link in a bank earnings recovery," DBRS said. The report also noted that mortgage banking income in general was lower when compared with the second quarter of this year.

Michael Brennan, co-founder and former president and CEO of First Industrial Realty Trust, has formed Brennan Investment Group LLC, a new Chicago-based industrial real estate investment firm. BIG will opportunistically acquire, develop and operate industrial properties in select major metropolitan markets throughout the United States. The firm's managing principals will co-invest with private and institutional capital, pursuing single asset and portfolio acquisitions, including acquisitions of debt. "We established Brennan Investment Group at one of the most opportune periods the industrial real estate market has ever seen," said Mr. Brennan, who will serve as chairman and managing principal of BIG. "The industrial real estate sector is a large, stable and diversified investment class offering a compelling opportunity for both current income and appreciation."

Donn C. Costa has been named acting president of Golf Savings Bank, Mountlake Terrace, Wash., a savings bank focused on single-family mortgage originations. He has been with Golf Savings since 1994 and has served as its executive vice president since 2006 when it was acquired by Sterling Financial Corp., Spokane, Wash.. Mr. Costa will work closely with Sterling's acting chief executive, Gregory Seibly, who was appointed as acting CEO of Golf Savings as well. Golf Savings Bank currently employs more than 600 people in 32 mortgage offices and retail banks across the Pacific Northwest.

The incidence of property valuation fraud rose 46% in the third quarter compared to the same period a year ago, according to a new report from risk mitigation firm Interthinx. Interthinx noted that on a sequential basis property valuation fraud jumped 25%. The company, whose software helps lender/servicers track fraud, said it is seeing a continued shift to fraudulent schemes involving short sales, real estate owned inventories and refinancing by borrowers whose equity has been impaired by falling real estate values.

Even though Genworth Financial posted a small profit in the third quarter, its U.S. mortgage insurance division continued to lose money, albeit at a lower rate. The MI unit posted a $116 million net operating loss in the quarter compared to a $121 million loss in the same period a year ago. Genworth said its primary insurance-in-force declined by $25.8 billion versus the prior year from a combination of lower net insurance written, rescissions, and higher claims paid. Genworth recently increased its maximum loan-to-value ratio to 95% in 199 metropolitan areas (from 90%) but has maintained more stringent LTVs in such battered markets as California, Florida, Arizona, Nevada and Michigan. The company noted that its U.S. MI business "achieved three consecutive quarters of increased loss mitigation savings and decreased losses." The life and mortgage insurer reported net income available to common shareholders of $19 million compared to a loss of $258 million in the year ago period. Meanwhile, in Friday afternoon trading most mortgage insurance stocks were tumbling along with the rest of the Dow, which fell 268 points in mid-day trading. However, Genworth, and Triad Guaranty of Winston-Salem, were exceptions. Triad, whose stock rose slightly, is in the process of self liquidating.

Senate Democratic leaders have scheduled a vote on Monday evening to break a filibuster on a bill to extend unemployment benefits and the homebuyers tax credit. If they get the 60 votes to end debate, the Senate should be able to pass the extension bill (H.R. 3548) next week — possibly on Monday. Republican senators have halted any action on H.R. 3548 for the past few weeks because the Democrats won't let them offer several unrelated amendments. One amendment calls for a sunset of the $700 billion Troubled Asset Relief Program and another involves the scandal involving the ACORN community group. After Monday's votes, Republican senators can still hold up passage for three more days. The extension bill will have to go back to the House of Representatives for a final vote. Supporters are hoping the House will not make any changes. Meanwhile, Democrats have added more tax items to the tax bill, including changes in the net operating loss carryback rules to make it more generous for businesses. But the bill still extends the $8,000 first-time homebuyer tax credit from December 1 through April 30 and gives buyers with a binding contract an extra 60 days to close. It also creates a new $6,500 tax credit for move-up buyers. The current homebuyers tax credit expires November 30.

The House and Senate moved quickly to pass an extension of the $729,750 GSE loan limit through the end of 2010, hoping to avoid any potential disruption in the mortgage market. Both chambers cleared the loan limit extension late Thursday as part of a continuing funding resolution. President Obama is expected to sign the continuing resolution (CR) shortly. The maximum $729,750 loan limit for Fannie Mae, Freddie Mac and Federal Housing Administration loans in high cost areas will expire at yearend, dropping to $625,500. The CR extends the higher loan limits through December 31, 2010. The CR also extends the nationwide $625,500 loan limit for FHA-insured reverse mortgages through December 2010. "Given the lack of a private secondary mortgage market, FHA, Fannie Mae and Freddie Mac are pretty much the only game in town," said Robert Story, chairman of the Mortgage Bankers Association. "Extending the current loan limits, along with other initiatives will help restore stability to the housing and mortgage markets." VA loans were not included in the extension. The Department of Veterans Affairs already has the authority to guarantee single-family loans with a maximum loan balance of $729,750 through December 31, 2011.

The Small Business Administration is creating a secondary market guarantee program for loans originated in its 504 Certified Development Co. program. A 504 CDC loan can be used to purchase real estate or other fixed assets related to a small business' expansion. It involves a 50% loan-to-value first mortgage provided by a private commercial lender without a government guarantee; a 40% second mortgage loan made by a CDC having the government guarantee; and a 10% borrower equity investment. The new program would encourage sales into the secondary market of the first mortgage portion and is funded through the American Recovery and Reinvestment Act. SBA said the recession has caused a significant decline in secondary market activity for the 504 first mortgage loans. Under the program, portions of eligible 504 first mortgages pooled by originators or broker dealers could be sold with an SBA guarantee to third-party investors in the secondary market. Lenders will retain at least 15% of each individual loan, pool originators will assume 5% of the risk, and the SBA will guarantee the remaining 80%. To be eligible to be included in a pool, the first mortgage must be associated with a 504 loan disbursed on or after Feb. 17, 2009. The program will be in place until Feb. 16, 2011, or until $3 billion in new pools are created, whichever occurs first.

Troubled assets that are partially real estate-related continued to affect Deutsche Bank AG to some extent in the third quarter but the company as a whole was nevertheless extremely profitable during the period. Deutsche Bank's problem loans increased slightly to 8.7 billion euros ($12.9 billion) in the quarter. Standard & Poor's analysts said the company's losses from erosion in commercial real estate loans and other problem assets are expected to persist into 2011. They left Deutsche Bank's ratings unchanged after reviewing its earnings for the period. Deutsche Bank generated 1.4 billion euros ($2.1 billion) in net income in the third quarter. This was roughly three times the 414 million euros ($615 million) in net income the company generated during the third quarter of last year. The gain in net income largely stemmed from tax benefits.

Evergreen Realty REIT has terminated its prior advisory agreement with Evergreen Realty Advisors and has entered into a new advisory agreement with limited liability company American Spectrum Realty Advisors, a subsidiary of the Houston-based real estate investment and management company American Spectrum Realty Inc. According to American Spectrum, Luke McCarthy and Forbes Burdette have each consensually resigned their positions as members of the board of directors of Evergreen, but will continue to consult with, advise and assist the new board of directors in all REIT matters. William J. Carden and Jonathan T. Brohard of American Spectrum Realty were appointed by the outgoing board of directors to fill vacancies on the Evergreen board. Mr. Carden and Mr. Brohard appointed Morris Cohen to fill the remaining vacancy on the REIT's board and to serve as an independent director to Evergreen. The new board of directors has voted to submit to Evergreen's shareholders for approval a proposal to change the name of Evergreen Realty REIT to American Spectrum REIT I. Pending receipt of such shareholder approval, the board of directors intends to conduct all future REIT business using this new proposed name.

Mission Capital Advisors LLC is currently marketing a portfolio of commercial mortgage loans with an outstanding balance of approximately $48 million. The company is soliciting final bids through Dec. 1 for the purchase of individual loans or the entire portfolio, which includes nonperforming assets secured by multifamily and office properties located in West Bloomfield, Mich. and Denver. The multifamily asset sale represents a follow on of sorts from a fourth quarter 2009 closing on behalf of the same CMBS special servicer. In the transaction, Mission Capital sold a large portfolio of mixed commercial mortgage loans of which four were secured by Class A multifamily located in the Bloomfield, West Bloomfield, and Novi, Mich. markets. Relative to the office asset in Denver, a communications company previously occupied the subject. It features large contiguous blocks of space in addition to state-of-the-art communications and power redundancy. For more information, go to missioncap.com/deals.

First American Corp., Santa Ana, Calif., is one step closer to being able to split its title and information systems businesses. The company has entered into an agreement with Experian that would facilitate the purchase of the latter's interest in First American Real Estate Solutions LLC. Parker S. Kennedy, chairman and chief executive of First American said this deal, along with the offer to reacquire the minority interest in First Advantage Corp., will allow the company to be on track to meet its spin-off target of the first half of next year; the deal should close, he continued on April 1, 2010, pending regulatory approval. First American had net income of $55.4 million ($0.59 per share) for the third quarter 2009, compared with a net loss of $8.3 million ($0.09 per share) one year prior.

The analysts at FBR Capital Markets may be the only ones' bullish on the future of MGIC. Fitch Ratings has cut its insurer financial strength rating on the mortgage insurance unit from "BBB-" down to "BB-" and cut the long-term issuer rating of the parent company to "B-" from "B". Fitch said it has concerns about capital adequacy, business continuity and holding company liquidity. "The ability of the operating company to continue to write new business remains uncertain, although recent developments indicate progress on that front," Fitch said. Parent company MGIC Investment Corp., it added, faces near to medium liquidity demands, with notes coming due in September 2011. Only FBR has a positive view on MGIC, keeping its outperform rating on the company. Standard & Poor's cut MGIC's financial strength rating from "BB" down to "B+", citing worries MGIC might not be able to repay those notes due next September. Plus it said there was a "high probability" the company would breach the 25:1 risk-to-capital regulatory requirement.

Stewart Information Services Corp., Houston, improved on its results from the third quarter 2008, but it still lost $23.7 million ($1.30 per share) for the same period this year; in the third quarter 2008, it lost $30 million ($1.66 per share). Stewart took pretax charges of $12.5 million in title loss reserve strengthening adjustments, $3.8 million relating to an increase in the title loss provisioning rate, $8.6 million related to large title losses and $2.2 million for the impairment of other assets. President and co-CEO Stewart Morris Jr., said the company is profitable to date for its affiliated title operations and its real estate information services segment. Market share has increased from 12.5% at the end of the third quarter 2009 to 13.1% for the most recent period. Orders opened during the quarter totaled 1.10 million, similar to the same period in 2008. But title loss payments increased from $30.8 million in the third quarter 2008 to $38.7 million for this year's third quarter.