Originations

The Senate has passed an appropriations bill that provides the Federal Housing Administration with authority to insure up to $400 billion of single family loans in fiscal year 2010. Lenders are on track to originate $335 billion of FHA loans in FY 2009, which ends September 30. The Senate also appointed conferees to meet with House appropriators to iron out a final Department of Housing and Urban Development appropriations bill for FY 2010. Like the Senate bill, the House bill provides $400 billion for FHA and $500 billion in commitment authority for Ginnie Mae. The House and Senate differ, however, on how to deal with an $800 million shortfall in the FHA reverse mortgage program. The Senate bill provides $288 million to cover part of the credit subsidy shortfall and instructs FHA to reduce the proceeds on FHA-insured home equity conversion mortgages to cover the rest of the shortfall. The House bill does not provide any funds. The House and Senate appropriators will have to resolve the HECM when they meet in conference. Reserve mortgage lenders are concerned a reduction in loan proceeds will diminish the value of FHA reverse mortgages and cut benefits for seniors.

The Federal Housing Administration is increasing its net worth requirements for approved lenders to $1 million and requiring banks to file audited financial statements for the first time ever. "With so many banks at risk of default, we want to make sure that our counterparty risk is being reviewed at FHA," said commissioner David Stevens. "Just the fact that they are supervised will no longer be enough." The agency released the tighter rules in response to a weakening capital position at the fund. (See story below.) FHA also is hiring its first credit risk officer and it is tightening its appraisal and refinancing requirements to curtail risk and conserve capital. On streamlined refinancings, FHA will require income verification and credit scores for the first time. The lender also will be required to demonstrate that the refinancing provides a "net tangible benefit" for the borrower. In addition, FHA will cap the maximum loan-to-value ratio on a streamlined refinancing at 125% and require an appraisal in all cases where the borrower wants to add closing costs to the loan amount.

The Federal Housing Administration has decided that "direct endorsement" lenders should be fully liable for the mortgages they originate through loan brokers while saying that these third-party salesmen no longer need to register or meet the agency's net worth requirements. The new policy change appears to be a major boost for brokers, whose ranks have been decimated during the housing and mortgage crisis. "Mortgage brokers will continue to originate FHA-insured mortgages through their relations with approved mortgagees," the agency said. "However, they will no longer receive independent FHA approval for origination eligibility." The new policy relieves brokers from filing audited financial statements with FHA and basically mirrors the hands-off approach that Fannie Mae and Freddie Mae follow with respect to brokers. FHA is making this change as part of a risk reduction effort and refocusing of its resources. However, the agency is adopting a policy that prohibits brokers and commission-based lender staff from ordering appraisals. FHA commissioner David Stevens stressed that FHA is adopting appraisals policies that are consistent with the Home Valuation Code of Conduct but not the entire HVCC that Fannie and Freddie have adopted.

Prosecutors in Vermont have secured the fifth conviction in a scheme that cost mortgage lenders over $11 million. Benjamin Osmanson of California and Sarita, Texas, pleaded guilty to charges related to his scheme to defraud mortgage lenders by submitting false loan applications in the names of "investors." According to the U.S. attorney's office for the District of Vermont, from at least as early as January 2006 through at least April 2007, he and co-defendant Jillian Protzman orchestrated the purchase of at least 50 properties in California, Florida, Kentucky and Vermont in the names of at least 10 investors, obtaining more than $26 million in loans to support the purchases. Osmanson recruited friends, family members and acquaintances to "invest" in real estate. He and Protzman then allegedly submitted fraudulent loan applications in the names of the investors to obtain loans. Osmanson, Protzman and others sought loans from multiple lenders and were said to have closed the loans for each investor within a short period of time in order to preserve the appearance of the investor's good credit until the transactions were complete. The defendants enriched themselves with commissions connected to the fraudulent property purchases and continued to recruit investors and submit applications for new loans, the investigation showed. During the plea hearing, Osmanson admitted his scheme caused more than $11 million in losses to the mortgage lenders as the properties went into foreclosure. Protzman pleaded guilty in August. Two mortgage brokers involved in the scheme, Mike Otis and Chris Whitfield, pleaded guilty earlier this year in the Western District of Kentucky. Florida realtor Margaret Giresi recently pleaded guilty in Vermont for her role in the scheme. Sentencing for Osmanson has not yet been scheduled.

Zacks Equity Research, Chicago, has made Zions Bancorp., Salt Lake City, the Bear of the Day for Sept. 16. Among Zacks' concerns is Zions' commercial real estate exposure. "CRE represents over one-third of Zions overall loan portfolio. Continued weakness in the residential development and construction activity in the southwest has resulted in further deterioration of credit metrics in the past several quarters. Given the sluggish economic conditions, we expect credit to further deteriorate across the industry in the coming quarters."

Residential Credit Solutions is the winner of the first FDIC Legacy Loan sale involving $1.3 billion in residential mortgages from the failed Franklin Bank in Houston. RCS, a residential mortgage investor and servicer based in Fort Worth, Texas, bid $64.2 million in cash to purchase a 50% equity stake in a limited liability company that will own the troubled assets. The Federal Deposit Insurance Corp. said the pilot sale was "very competitive" and it expects to recover 70% of the outstanding balance on the nonperforming loans. "The bid received from RCS for the financed sale of assets to the LLC using 6-1 leverage was determined to be the offer that would result in the greatest return to the [Franklin] receivership of all competing bids," FDIC said. RCS will manage the LLC portfolio and service the loans under the Home Affordable Modification Program. The company could not be reached for comment.

Barclays PLC, London, is shifting $12.3 billion in problem assets from the recent U.S. mortgage/financial crisis into a new third-party vehicle in a deal it will fund over 10 years through a $12.6 billion loan to the third party involved. The assets are being sold to Protium Finance LP, a newly established fund designed to purchase credit market assets from third parties and manage them over time. Protium's partners are providing $450 million of funding for its activities. The Barclays loan will be used primarily to fund Protium's purchase of the assets from Barclays. Protium is run by C12 Capital Management, an independent asset management firm run by Stephen King, who previously was head of Barclays Capital's principal mortgage trading group, and Michael Keeley, who previously was a member of Barclays Capital's management committee covering European financial institution. Neither will be tied to Barclays. The assets will stay on Barclays' balance sheet for regulatory purposes and it will continue to hold capital against them. Barclays said the deal is aimed at restructuring exposure to the risk in the assets in such a way that it mitigates the potential impact of short-term movements in market values and monoline downgrades.

Non-bank mortgage lenders hit the ball out of the park in the first quarter of this year, reaping an average profit of $1,088 on each loan funded — a six-fold increase in profitability over the fourth quarter of 2008. A new report issued by the Mortgage Bankers Association shows that higher loan production and refinancing activity produced a remarkable turnaround for the 319 mortgage companies that responded to its survey. "It was a needed boost for the mortgage industry," said Marina Walsh, MBA associate vice president of industry analysis. Average loan production per company jumped to $214 million in first quarter, compared to $126 million in fourth quarter, as refinancings made up 66% of production. In addition, operating expenses on a per loan basis dropped due to the higher loan volume. The "net cost to originate" fell to $1,725 per loan in the first quarter, down from $2,324 in the fourth quarter.

The Internal Revenue Service and Treasury Department have issued new regulations related to certain modifications of commercial mortgages held by real estate mortgage investment conduits. The new regulations, which were not expanded to include mods of commercial mortgages held by investment trusts as some in the industry have proposed, would allow lenders to modify commercial real estate loans held by REMICs in some cases without incurring tax penalties. The IRS and Treasury Department said they would continue to consider whether the new regulations should also be expanded to investment trusts. The Real Estate Roundtable has been a proponent of the REMIC change.

The downgrade of the insurer financial strength and issuer default ratings of Fidelity National Financial Inc., Jacksonville, Fla., by Fitch Ratings, Chicago, means the rating agency has downgraded three of the four remaining national title underwriting groups in the past week. Fitch cut FNF's IDR by two notches, from "BB" down to "B+". The two-notch downgrade, the Fitch report said, reflects not only the IFS cut on FNF's title insurance subsidiaries, but the greater weight given the substantial amount of goodwill at the holding company level. FNF has a debt-to-tangible capital ratio of 44% as of June 30, which Fitch categorized as outside its expectations. A positive is that FNF reduced financial leverage by paying down debt after an equity offering in April 2009. The IFS downgrade affects all FNF title subsidiaries except the former LandAmerica operations. The rating was dropped to BBB- from BBB. Fitch feels FNF has an aggressive capital management strategy, resulting in a higher operating leverage at the underwriting units than its competition. Despite this, Fitch retains an investment grade IFS rating on FNF in recognition that its historical results through the first half of this year have been better than its competition's. Another positive is that FNF now has a 46% market share, thanks to the LandAmerica acquisition.

In order for Radian Group to continue writing new mortgage insurance policies in 2010 and beyond, the company is considering a number of alternatives, including reactivating a subsidiary, said chief executive S.A. Ibrahim. Speaking at the Barclays Capital Global Financial Services Conference, he said the company is exploring the use of its Amerin Guaranty subsidiary to write new business in the 14 states that have risk-to-capital limits if necessary. The company supports industry efforts for regulatory or statutory relief by reducing the 25-to-1 risk requirement in those states. Among the states where such action has recently occurred is Arizona. Radian is also evaluating its reinsurance relationships in order to reduce its risk-to-capital ratio. As of June 30, Radian was in compliance with a risk-to-capital ratio of 15.9-to-1. But, Mr. Ibrahim said, this ratio is sensitive to future defaults, so it has the two initiatives underway. Depending on regulatory approval, one or both can be in place. When asked by an attendee why loans are less likely to cure in this downturn than in the past, Mr. Ibrahim said his opinion was that the decline in home values removed the opportunity for a borrower in trouble to have the ability to sell the property and get out of trouble.

The upward climb of the Mortgage Bankers Association's Market Composite Index came to a halt the week ended Sept. 11, which was a shortened time period because of the Labor Day holiday. The MCI, calculated from the MBA's Weekly Mortgage Applications Survey, decreased 8.6% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 18.3% compared with the previous week and decreased 18.7% compared with the same week one year earlier. MBA stopped disclosing index values with the July 31 data release. The Refinance Index decreased 7.4% from the previous week and the seasonally adjusted Purchase Index decreased 10.3% from one week earlier. Even though the Refinance Index declined, the share of refinancing applications increased to 61.0% of total applications, up from 59.8% the previous week. The share of adjustable-rate mortgage applications for the week was 6%, up from 5.8% one week prior. The average contract interest rate for 30-year fixed-rate mortgages increased to 5.08% from 5.02%, with points declining to 0.98 from 1.23 (including the origination fee) for loans with an 80% percent loan-to-value ratio, the association reported. However, the other two rates tracked by the MBA survey went in the opposite direction as the average contract interest rate for 15-year FRMs decreased by 4 basis points to 4.41%, while for one-year adjustable rate loans, it decreased by 8 BP to 6.61%. The MBA can be found online at http://www.mortgagebankers.org.

Fannie Mae has named former PHH Mortgage chief Terry Edwards — who steered that nonbank through the worst of the mortgage crisis — as its new EVP in charge of portfolio management. At Fannie he will focus on the GSE's foreclosure prevention and loss mitigation activities for its single-family book of business. Until a few months ago Mr. Edwards was PHH's CEO but when a new control group — led by former Freddie Mac CEO Greg Parseghian — took charge of PHH he found himself serving only as a consultant. (PHH is a top ten ranked lender/servicer.) Even though subprime and alt-A lending boomed from 2003 to 2008 PHH stood mostly on the sidelines, concentrating on GSE and FHA lending. PHH is the nation's largest private label funder/servicer.

When banks modify a mortgage to make the payments more affordable, it is not only considered a troubled debt restructuring by the federal banking regulators, the regulators also expect banks to increase their allowances for loan losses. "It could result in more significant allowances for TDRs," said Kathy Murphy, chief accountant for the Office of the Comptroller of the Currency. The OCC official told the certified public accountants at their annual banking conference that most banks don't have a history of doing loan modifications. Nevertheless, banks are expected to do a Financial Accounting Standard 114 analysis of future cash flows on modified loans using current market trends to determine the appropriate impairment, she said. "Trends right now don't look like real estate is recovering," OCC's chief accountant said. Tom Kelly of PriceWaterhouseCoopers told the CPAs that a lot of firms are struggling with the complexity of FAS 114 and TDRs. "It is complex from an accounting standpoint and from an operational aspect," Mr. Kelly said.

The mortgage and finance company subsidiaries of bank holding companies will now be subject to consumer compliance reviews by the Federal Reserve Board. "The policy, which takes effect immediately, also provides for investigation of consumer complaints against nonbank entities," the Fed said. The Fed is the primary supervisor of bank holding companies but it has traditionally taken a hands-off approach to nonbank subsidiaries. There have been exceptions, however. Fleet Finance, the Atlanta subsidiary of a BHC, was charged and settled state allegations of predatory lending in 1992. Under chairman Ben Bernanke, the Fed initiated coordinated exams of nonbank subs with the Federal Trade Commission and state regulators in 2007. The new policy "builds on the pilot program and responds to a need for more effective supervision and consumer protection," the Fed said.

The House of Representatives late Tuesday approved legislation to beef up the Federal Housing Administration program — including a provision that encourages the Obama administration to provide support for warehouse lending. The "21st Century FHA Housing Act" gives the Department of Housing and Urban Development secretary more flexibility to appoint and fix the compensation for FHA personnel and to fund technology projects to replace FHA's aging information systems. Passed on a voice vote, the bill (H.R. 3146) also says that the Treasury Department, HUD and the Federal Housing Finance Agency should work together to provide financial support and assistance to increase warehouse lending capacity to nonbanks. The National Association of Home Builders, National Association of Realtors and Mortgage Bankers Association supported the bill.

Former top executives at Fannie Mae, PMI, and Countrywide have launched and are seeking to expand a new advocacy group that will lobby on behalf of what it calls "independent, community and regionally-based" mortgage banking firms. The Community Mortgage Banking Project already has 26 members and is talking to eight more, said group founder, Glen Corso, a former senior vice president for The PMI Group, a mortgage insurance firm. His partners in the project include Robert Engelstad, a former senior vice president at Fannie, and Pete Mills, who was Countrywide Financial Corp.'s top lobbyist in Washington. In an interview with National Mortgage News Mr. Corso said his group would not compete with the Mortgage Bankers Association per se but would be involved in lobbying, and legislative and regulatory analysis on behalf of its members. Mr. Corso noted that the CMBP is a "not-for-profit company" but for tax purposes will not be filing as a nonprofit (which enjoy certain federal tax breaks). The MBA, by contrast, is a (Form 990) nonprofit organization with annual results that are publicly available. He said the CMBP would stay away from holding trade shows and getting involved in educational programs — two major sources of revenue for MBA. Mr. Corso is a founding member of The Warehouse Lending Project. That group has been lobbying regulators for government help with efforts aimed at increasing warehouse-lending capacity for nonbanks.

Fitch Ratings, Chicago, has downgraded the insurer financial strength rating of Stewart Title Guaranty Co., Houston, from "A-" to "BBB+" and the issuer default rating of Stewart Information Services Corp., from "BBB" to "BBB-" citing a below average profitability relative to peers and declines in statutory surplus. Through the first half of 2009, Stewart's GAAP pretax operating margin was -7.7% compared to a peer average of 2.8%. Similarly, Stewart's statutory capital levels were down 13% since year-end compared to a dollar weighted peer average of positive 4%. In the past Stewart's ratings benefited from the assumption that the company's technology-related investments would allow it to show better margins than the competition during a down market, but Fitch said this has not been the case. Separately, Fitch downgraded the IDR of First American Corp., Santa Ana, Calif., from "BBB" to "BBB-" and the senior unsecured debt rating from "BBB-" to "BB+". The change in ratings "reflects a heightened scrutiny of the company's 47% debt to tangible capital ratio as of June 30, 2009 given the current stressful environment," Fitch said. FAF has long planned to spin-off its title and specialty insurance business from the information services business. The rating agency said an unfavorable result of the spin-off is that FAF would lose the benefits of the unregulated cash flows of the information solutions business.

House Financial Services Committee chairman Barney Frank, D-Mass., said he is working with small banks and credit unions to craft a bill that will create a new consumer protection agency. Many financial services groups and the U.S. Chamber of Commerce have lined up against the creation of a new agency that would write and enforce the rules for mortgage and other forms of consumer lending. But chairman Frank is trying to get small depositories on his side as his committee prepares to mark up a Consumer Financial Protection Agency bill on Sept. 23. "We are working with them on legitimate concerns and I am confident we will get a tough enforcement agency to protect consumers," Rep. Frank said in an interview with Bloomberg News. The Independent Community Bankers of America has been talking with Rep. Frank. "We have offered our ideas. We will have to see how far he goes," said ICBA's top lobbyist Steve Verdier. The Financial Services Roundtable opposes the idea of stripping the federal bank regulators of their consumer protection functions and giving the CFPA enforcement and rulemaking authority over national banks. "The better answer to consumer protection is to amend the charters of the existing prudential regulators, giving consumer protection parity with safety and soundness regulation," Roundtable president and chief executive Steve Bartlett said.

Genworth Financial, Richmond, will take a $65 million provision to settle a $531 million bulk insurance dispute concerning payment option ARMs. In a new filing with the Securities and Exchange Commission, Genworth said it went to arbitration with an undisclosed lender and reached a settlement. The company, which owns the nation's fourth largest MI (in terms of policies-in-force), said "After giving effect to the premiums retained, settlement payments, and other consideration exchanged by the parties, we have made an additional provision for obligations" that will cost it $65 million. Meanwhile, Genworth has commenced a $500 million public offering of common stock in a deal underwritten by Goldman Sachs, Bank of America/Merrill Lynch, and Deutsche Bank. A new research note from Sandler O'Neill says the company is still considering "strategic alternatives" for its MI business.