Originations

A Republican Congressman from New Jersey is working on legislation to facilitate the issuance of covered bonds in this country and create a market for these bonds that are collateralized by mortgages which remain in the issuing bank's portfolio. "This type of securitization is widely used in Europe to provide liquidity to their mortgage markets and I believe they could be very effective in increasing mortgage funding in the U.S.," Rep. Scott Garrett said at a House Financial Services Committee hearing. He noted that committee chairman Barney Frank, D-Mass., is planning to hold a hearing on covered bonds. The hearing has not been scheduled yet. The Treasury Department has issued guidance on covered bonds and the Federal Deposit Insurance Corp. issued a policy statement on covered bonds in August 2008. But Rep. Garrett contends that investors need more assurance that FDIC will not repudiate a covered bond if an issuing bank fails. A spokeswoman for Rep. Garrett noted that a covered bonds statute would provide more certainty than any regulatory change. "And the certainty could lower transaction costs because the investors and issuers aren't going to be pricing for the uncertainty," spokeswoman Erica Elliott said.

Franklin Credit Management Corp., the Jersey City third-party mortgage servicer, has expanded its operations to include Face-to-Face Home Solutions, a door knocking division that tries to reach delinquent borrowers. Gordon Jardin, Franklin Credit's chief executive, said the unit was started from scratch earlier this year as part of a broader repositioning of the company, which now offers underwriting, due diligence and asset valuations. Franklin had been a subprime lender that $54 billion-asset Huntington Bancshares Inc., in Columbus, Ohio, inherited from its 2007 purchase of Sky Financial Group. The company currently services 32,000 loans, most of them second mortgages, worth more than $2 billion. "We are definitely actively involved in trying to find ways to maximize the returns to Huntington on that portfolio," Jardin said in an interview. Franklin's strategy had been "to maximize cash flow," Jardin said, while Huntington's strategy now is to work out the loans. "I think most companies are trying to determine what their strategy should be," he said. "It's too early to determine how well the performance of loans will be if we modify them," under the Obama Administration's Home Affordable Modification Program. Franklin "has had the beginnings of some success" is reaching delinquent borrowers though it is too early to tell if the contact rate is better than the industry average. Roughly 50% of delinquent borrowers have no contact with their servicer before a home goes into foreclosure. "That's frustrating, because you do have a legal contract, you have an agreement with the borrower and why they can't make a payment often is unclear," Jardin said.

The yield on the benchmark 10-year Treasury was rising as the weekend approached with the rate reaching 3.83%, and stoking fears that the refi boom may get clipped. The yield on the 10-year had reached 3.70% during the recent rate spike but then subsequently had been trading in a range below that point. Contributing to the yield's move to a higher range were employment statistics that remained largely negative but included a job loss figure that was not as bad as expected. This adds to evidence that the economic downturn may be slowly decelerating over the next six to nine months as part of a "troughing" process, Credit Suisse chief economist Neal Soss said in a call to investors Friday morning. When it comes to how this affects housing "the most important thing will be mortgage rates" and how rates affect affordability, said Dan Oppenheim, U.S. homebuilders and building products equity analyst at Credit Suisse. However, he said that the increase in rates to date has not hurt affordability.

Rising interest rates have already impacted mortgage refinancings and could undermine the housing recovery, according to a senior economist at Wells Fargo & Co. "Just as we are hitting bottom in the housing market, there is a lot of uncertainty about how strong the recovery will be," said Scott Anderson, senior economist at Wells Fargo. The May jobs report shows that job losses slowed to 345,000 a month, compared to 700,000 during the winter. "It's a good sign and it bolsters the argument the housing market should bottom in terms of sales and perhaps in starts" possibly in June or July, he said. However, the Federal Reserve is struggling to keep mortgage rates low, he said. Refinancing activity has dropped off. "Home purchase activity could wallow at moribund levels," Mr. Anderson said.

Angelo Mozilo, the founder and former chairman/CEO of Countrywide Financial Corp. — and an icon in the industry for many years — was slapped with a massive civil fraud complaint by the Securities and Exchange Commission on Thursday afternoon, accused of deliberately misleading investors in the company's stock and engaging in insider trading. David Siegal, Mr. Mozilo's attorney released a statement calling the SEC charges "baseless," adding that the lender's risks "were well disclosed to and understood by the marketplace." The SEC also sued former CFC executives David Sambol and Eric Sieracki, accusing them and Mr. Mozilo of "falsely assuring investors" that Countrywide was funding "primarily" prime quality loans and had avoided the excesses of its competitors. The two men could not be reached for comment. Last summer Bank of America bought CFC for a few dollars a share compared to a one-time high of $40. The agency released a memo that Mr. Mozilo wrote in April 2006 where he refers to Countrywide's subprime business as "the poison of ours." According to figures compiled by National Mortgage News Countrywide was the nation's largest subprime lender and servicer during its final years of operation, but had not made a serious run at A- to D lending until the early 2000s. The agency accuses him of selling $140 million of stock from November 2006 until August 2007 while "he was aware of material, non-public information concerning Countrywide's increasing credit risk." In past interviews with NMN Mr. Mozilo maintained that his stock sales were legal and followed the rule of law. In March 2007 he told this newspaper that he was selling the stock in question, noting, "I have almost all my personal net worth tied up in the company." He defended the sales, saying "I have created $25 billion in value for the shareholders. It's been one of the best performing stocks on the New York Stock Exchange. I gave them 98% of the value and took 2%. And they [the shareholders] didn't have to do the work. I did it for them."

In charging former Countrywide CEO Angelo Mozilo with fraud, the Securities and Exchange Commission is zeroing in on the lender's payment option ARM business, a controversial product that Mr. Mozilo initially embraced and then later cursed. According to figures collected by National Mortgage News Countrywide Financial Corp. was the nation's largest POA lender in 2006, a year in which Mr. Mozilo wrote several memos cited by the SEC in its complaint. (CFC was also the largest POA funder in 2007, originating a record $86 billion in these notes which eventually can become negatively amortizing.) In one memo Mr. Mozilo laments that CFC has "no way, with reasonable certainty, to assess the real risk of holding" POAs on its balance sheet. He adds that by putting so many loans on CFC's books "we are flying blind on how these loans will perform in a stressed environment." One loan broker who funded POAs for CFC told this newspaper that the loans were hugely profitable for the company because of all the points it charged on them. When CFC was eventually sold to Bank of America last year it had $80 billion in loans on its balance sheet -- including POAs and second liens. The SEC accuses Mr. Mozilo of knowing how risky these products were but without sharing his opinions with investors. "Concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk," said SEC director of enforcement Robert Khuzami. During CFC's last year of operations, the lender began sending out warning letters to borrowers who were choosing the 'neg am' option on POAs, telling them of the risks.

Mortgage companies cut 4,500 full-time employees from their payrolls in April after a first quarter surge in originations, particularly refinancings, began to lose some steam. The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector fell to 266,100 positions in April from 270,600 in March. Compared to the same month a year ago employment was down 15%. However, the number for active mortgage brokers rose by 1,200 in April to 74,600. Banks and thrifts reported a 70% jump in originations from the fourth to the first quarter. Fannie Mae and Freddie Mac reported a surge in refinancings in March followed by a pullback in April. Fannie's purchases of refinancings dropped from $77 billion in March to $45.5 billion in April and Freddie's fell from $52 billion to $43.3 billion in April. Mortgage Bankers Association vice president for research Michael Fratantoni said company announcements about hiring have involved "relatively small numbers" compared to the 47% drop in total industry employment since the peak in 2006. "The pace of decline [in industry employment] is slowing but we are still seeing some declines," Mr. Fratantoni said.

Renowned mortgage industry sales trainer Todd Duncan has joined Prospect Mortgage, Sherman Oaks, Calif., as its chief performance officer. In a call with the company's staff, chief executive Ron Bergum said to be the best in class in the industry, the key is to have the "foundational pillars" in place and one of those was sales training and performance. Besides the loan officers, Mr. Duncan will work with Prospect's operational support team and corporate management. During the call, Mr. Duncan said "our team is going to be the best trained group in the industry, bar none," and that Prospect is going to raise the standards of the mortgage industry and that not only the company's staff will benefit but its customers will benefit as well. Mr. Bergum added that Prospect is going to "take the market by storm and we're not asking." Among the acquisitions made by Prospect in the last couple of years are Metrocities Mortgage, the retail mortgage banking branches of IndyMac Bank, Opteum Mortgage and F&T Mortgage. Mr. Duncan will continue to work as a sales consultant for companies outside of the mortgage industry, and also continue his efforts as a business writer and motivational speaker.

One of the few remaining assets in the estate of American Home Mortgage Investment Corp., a Chicago-based thrift, will be sold to The Bancorp Inc., Wilmington, Del. The thrift, American Home Bank, was acquired by Melville, N.Y.-based AHM subsidiary American Home Mortgage Holdings Inc., in October 2006 and was formerly known as Flower Bank FSB. The United States Bankruptcy Court for the District of Delaware approved the deal on May 15; while American Home Mortgage Investment and American Home Mortgage Holdings have filed for bankruptcy protection, American Home Bank has not. The Bancorp gives the purchase price as between $7 million and $11 million. Back in October 2006, American Home needed to make a $50 million recapitalization of Flower after the deal was completed. The Bancorp is the parent company of an online commercial bank. The deal provides the company with an Office of Thrift Supervision charter, which will give it a platform for national operations and support the continued growth of its prepaid card issuing and private client business lines. It will also support expansion of national deposit gathering strategies. The Bancorp expects that following payment of a potential dividend by American Home Bank to its parent, the tangible book value of American Home Bank at closing will not exceed $11 million. The deal still needs the approval of the OTS and the Federal Reserve Board.

GMAC Financial Services said it has priced $4.5 billion of debt guaranteed by the Federal Deposit Insurance Corp. through the agency's Temporary Liquidity Guarantee Program. GMAC, the parent of Residential Capital Corp., the nation's fifth largest mortgage servicer, said the offering will further improve its liquidity position. The securities offering included $3.5 billion of senior fixed-rate notes and $1 billion of senior floating rate notes. The debt comes due in December 2012. In May 2009, GMAC received regulatory approval to participate in the TLGP for up to $7.4 billion. Earlier this year the company received a $5 billion infusion through the Treasury Department's TARP program.

Increasing numbers of corporate credit unions — which service as wholesale banks to retail CUs — are reporting large losses due to their holdings of mortgage-backed securities. According to a report in The Credit Union Journal, corporate credit unions provide liquidity and investment services to the nation's 7,800 regular credit unions. The combination of MBS losses and exposure to their own wholesale bank, U.S. Central FCU, which failed in March because of its MBS holdings, has sent regulatory capital at most of the corporates below regulatory minimums. But because of a regulatory forbearance offered by the CU regulator, the National Credit Union Administration, all of the corporates are now allowed to use their capital levels of last November. Florida-based Southeast Corporate FCU recently reported that charges related to its shares in U.S. Central and its mortgage-backed securities created a $79 million loss for the month of April. And SunCorp FCU, in Colorado, said it restated its 2008 financials to show a $135 million loss for the year. CUJ is a sister publication to National Mortgage News.

Commercial/multifamily mortgage origination volumes decreased 65% in 2008 as the number of loans intended for securities fell off sharply. Mortgage bankers closed $181.4 billion in commercial and multifamily loans, according to the Mortgage Bankers Association's 2008 Commercial Real Estate/Multifamily Finance: Annual Origination Volume Summation. The MBA report showed that decreases were seen across all property types and most investor groups. The largest declines were in loans intended for commercial mortgage-backed securities, collateralized debt obligations and other asset-backed security conduits. Intermediated loan volume decreased 68% between 2007 and 2008. "After seeing considerable growth in 2006 and 2007, commercial mortgage originations fell dramatically in 2008," said Jamie Woodwell, MBA's vice president of commercial real estate research. "The continuing credit crunch, a relatively low volume of commercial mortgages maturing in the coming years and little incentive for property owners to sell their properties all continue to put downward pressure on origination volumes." Originations were dominated by multifamily loans, representing $64.6 billion, or 36% of the lending total. Among major investor groups, CMBS, CDO and other ABS conduits saw the greatest percentage decrease in volume between 2007 and 2008, followed by real estate investment trusts, special finance companies and life insurance companies. Lending for hotel/motel properties had the largest decrease in originations by property type, followed closely by office properties.

The average rate for a 30-year fixed rate mortgage according to the Freddie Mac Primary Mortgage Market Survey for the week ended June 4 jumped to a high not seen since late last year. That reflects a recent spike in the benchmark 10-year Treasury yield. The average 30-year FRM rate was 5.29%, up from 4.91% the previous week but down from 6.09% a year ago. "Thirty-year fixed-rate mortgage rates caught up to the recent rise in long-term bond yields this week to reach a 25-week high," said Frank Nothaft, Freddie Mac vice president and chief economist. Points for fixed rate loans averaged 0.7 during the week and 0.6 for hybrid Treasury indexed adjustable rate mortgages and one-year Treasury ARMs. Rates for all loan types rose.

Weighted-average delinquencies and cumulative losses in the United Kingdom's securitized residential mortgages have doubled since the first quarter of last year, according to Moody's Investors Service's index. These had reached 18.0% and 0.78%, respectively, by the end of the first quarter of this year. "While a number of forward looking indicators point towards the pace of the economic decline abating, consensus forecasts look for 3.8% contraction in [gross domestic product] over 2009 as a whole, which will be the worst yearly growth rate since modern records began in 1949," said Nitesh Shah, a Moody's economist and co-author of a report on the index. "The U.K. unemployment rate was 7.1% in the three months [leading up] to March, up from 5.2% a year ago. As the economy contracts, more jobs are expected to be removed from the market." In addition, Moody's noted that home price declines also contributed. The downward slide in housing values will likely continue even though the monthly pace of the decrease has been slowing, Moody's said.

Maria Sanchez, a real estate agent and loan officer from El Monte, Calif., was found guilty of fraud and money laundering charges for scheming with her sister to falsify home loan applications. The evidence presented during Maria's trial showed she submitted loan packages to purchase residential real estate in the names of family members. Those applications contained false statements and forged signatures. When the loans were funded, Maria fraudulently obtained more than $1 million in loan proceeds from financial institutions and mortgage lenders. She financially benefited from this scheme by flipping one of the properties, as well as collecting points, fees and commissions from the loan transactions. In three of the deals, Maria's sister Beatriz Sanchez, Los Angeles, was identified as the buyer of the property. Beatriz also has pleaded guilty, specifically to charges that she filed false documents with the IRS. Beatriz is scheduled for sentencing on Aug. 17. Maria is scheduled for sentencing on September 10.

A.M. Best Inc., Oldwick, N.J. has cut by one notch the financial strength ratings of Fidelity National Financial Inc., Jacksonville, Fla., and its title insurance units. The New Jersey-based rating agency said the downgrades were due to the adverse implications of FNF's acquisition of the title insurance underwriting subsidiaries of LandAmerica Financial Group Inc., Richmond, Va. The deal made FNF the nation's largest title insurer with a 45% market share, but it also resulted in an increase in underwriting leverage. "While Fidelity in the past has shown an ability to manage large acquisitions, such as its acquisition of Chicago Title in 2000, the current negative business environment poses a greater challenge as it proceeds with the integration of its newly acquired underwriters," A.M. Best said.

Thrifts originated $88 billion in 1-4 family loans in the first quarter, up 69% from the previous quarter, as serious delinquencies hit a record level and the Office of Thrift Supervision anticipates a surge of resets on Alt-A and payment-option loans later this year. The 801 OTS-supervised thrifts posted a $47 million loss for the first quarter, the best performance for the thrift industry since third quarter of 2007. OTS acting director John Bowman said thrifts are "not out of the woods yet." But earnings were essentially at the "break even level," he said, and thrifts are well positioned with "solid capital, strong levels of loan loss reserves and improving operating income." However, non-current single-family loans (90 days or more past due or in non-accrual status) hit a record 5.2% as thrifts charged off $916 million in bad mortgages. OTS officials expect defaults and foreclosures will increase as house prices continue to decline and more mortgages lose all their equity. Moody's Economy.com is projecting that the number of underwater mortgages will rise from 15.4 million in first quarter to 17.5 million by the first quarter of 2010. OTS senior economic advisor Sharon Stark also noted that loss severity rates on Alt-A and payment-option ARMs are 55 cents on the dollar.

An increase in weekly loan purchase applications failed to offset a decline in refinancing from a recent rate spike, according to the Mortgage Bankers Association's index. The MBA's Weekly Applications Survey Market Composite Index fell over 16% on a seasonally- and holiday-adjusted basis. For the week ended May 29, the MCI was 658.7, compared with 786.0 one week earlier. The refinance share fell to 62.4% of total applications from 69.3% the previous week. The Refinance Index decreased 24.1% to 2953.6 from 3890.4 the previous week. But the seasonally adjusted Purchase Index increased 4.3% to 267.7 from 256.6 one week earlier. On an unadjusted basis, the index decreased 32.5% compared with the previous week and increased 14.4% compared with the same week one year earlier. Adjustable-rate mortgages accounted for 3% of applications, up from 2.6% for the previous week. There was an increase in the average contract interest rate for 30-year fixed-rate mortgages to 5.25% from 4.81%, with points (including the origination fee) decreasing by 26 basis points to 1.02 from 1.28 for loans with 80% loan-to-value ratios. The MBA can be found online at http://www.mortgagebankers.org.

The Consumer Mortgage Coalition is urging the government-sponsored enterprises' regulator to suspend the conforming loan limits and allow Fannie Mae and Freddie Mac to purchase single-family loans of up to $1 million. It is difficult and expensive to get jumbo loans and the current GSE loan limits that range from $417,000 to $729,750 are "causing market disruptions," the mortgage industry group says in a letter to the Federal Housing Finance Agency. "We recommend that the conforming loan limit be suspended for loans below $1 million while the FHFA serves as the GSE conservator so that the government-sponsored enterprises can add liquidity throughout the mortgage market and across the country," CMC says in a June 1 letter. Separately, the Mortgage Bankers Association is urging Congress to permanently raise the GSE conforming loan limit to $625,000 and retain the flexibility to provide financing of up to $729,750 in higher cost markets.

GMAC Financial Services — which controls the nation's fifth largest residential servicer — says it's "business as usual" at the company even though one of its owners, General Motors, filed for bankruptcy protection on Monday. A GMAC spokeswoman stressed that "we have no intention of filing for bankruptcy," adding that GM owns only 10% of the financial services company. GMAC is a bank holding company that a few months ago completed a large restructuring with its bondholders. Hedge fund giant Cerberus Capital owns 22% of GMAC with the U.S. Treasury owning a large piece as well because of a $5 billion TARP investment. Asked if GM might sell its stake in GMAC, the spokeswoman declined to comment.