Originations

Speakers at the National Association of Home Builders' annual convention are not very optimistic about the sagging housing market turning around any time soon. "At some point, new household formations will drive what we all need and we are going to get back to a run rate of over one million new home sales," Stuart Tyrie of Wells Fargo Home Mortgage told the NAHB's single-family finance subcommittee. But that won't be until 2014 at the earliest, he ventured. Mr. Tyrie, who runs Wells Fargo's National Builder Division, said the fallout from the subprime debacle is "behind us," but failures among borrowers who hold option ARMs will run "well into 2012." Mike Sivage, a builder-developer from Albuquerque who chairs the group's Financial Institutions and Capital Markets Subcommittee, said the New Mexico market is continuing to decline. "It's not getting any better where I am," he said. Even Texas, one of the lone bright spots, is starting to fade, according to Kent Conine, a past NAHB president who chairs the group's AD&C Financing panel. "We did fine until the oil prices tanked," the Dallas builder said. People are still visiting model homes, but now, like in other parts of the country, they are waiting for prices to hit bottom, he said. Daniel Finnegan, a Florida-based consultant who advises builders on construction financing, said it could be two years before lenders have enough liquidity to weather regulatory scrutiny. Until then, he said, money to buy and develop land will be hard to come by. Bill Rothman of IndyMac Bank, Irvine, Calif., agreed. "We have a lot more pain to endure," he said. The conference is in committee meetings prior to the big grand opening ceremonies scheduled for Inauguration Day.

A National Association of Home Builder task force on housing finance has recommended that the politically powerful organization adopt a policy blueprint that calls for a sharing of the interest rate and credit risk by the private sector institutions which benefit from the government's secondary market support. The task force, which was established by the NAHB's senior officers last fall, also recommends that Fannie Mae and Freddie Mac retain their federal backing but be limited primarily to providing credit enhancements for mortgage-backed securities. The sharing concept would be a "cooperative structure" loosely based on the Federal Home Loan Bank model, according to Chellie Hamecs, assistant staff vice president for housing finance. Under the proposal, lenders would be liable for a "significant portion of the risk" in direct proportion to the volume of loans they sell to the government-sponsored enterprises. As envisioned by the task force, Fannie and Freddie would be given only limited portfolio capacity and then only to accommodate mortgages and housing-related investments that have no other secondary market outlet. The report, which is being discussed at the NAHB's annual convention in Las Vegas, noted "serious structural problems" with the nation's housing finance system, including what it called "the inherent conflict" in the current Fannie-Freddie business model in which the companies are required to pursue a public mission while providing competitive returns to private stockholders. These and several other policy recommendations must pass through several committees before they are voted on by the NAHB's board on Thursday (when it meets later this week.)

Zacks Equity Research, Chicago, has picked Wilmington Trust Corp. as its "Bear of the Day" for Jan. 16, 2009. "The company recently announced that it expects to record a much larger than earlier expected provision for loan losses, and will likely record a charge (yet undetermined) related to other-than-temporary impairment of its trust-preferred securities portfolio," Zacks said. Wilmington Trust has a large financial exposure to real estate construction loans. Wilmington Trust will release results on Jan. 30, 2009. Zacks is calling the company a "sell."

Credit quality -- including mortgages -- continued to deteriorate at Bank of America, contributing to its fourth quarter net loss of $1.79 billion. The nation's largest bank released earnings Friday morning, a day after the Treasury Department agreed to invest another $20 billion of taxpayer money into it. The government also will backstop as much as $118 billion in potential losses on various assets, primarily those brought by Merrill Lynch. The 4Q loss includes Countrywide's operations, but not Merrill Lynch's. Preliminary figures show that Merrill Lynch -- a large issuer of subprime ABS and CDOs -- lost $15.31 billion for the fourth quarter. At year end BoA had $18.23 billion in non-performing assets, compared to $5.95 billion a year earlier. The company increased its loan loss provision to $8.54 billion. During 2008, BoA and Countrywide modified approximately 230,000 home loans. In the fourth quarter, BoA extended $115 billion in new credit: $45 billion in mortgages, $7 billion of commercial real estate, and roughly $5 billion in home equity products. For the full year, BoA earned $4.01 billion.

Steep losses on asset-backed securities and additional loan loss provisions contributed heavily to Citigroup's $8.29 billion fourth quarter loss. Lower mortgage servicing income, as well as rising delinquencies on both first and second mortgages, also weighed on Citi's results, contributing to a 22% decline in consumer banking revenue. Citi's consumer banking division, which includes its mortgage operations, suffered $1.6 billion in fourth quarter credit losses. And the company added $2 billion to its consumer banking loan loss reserves, reflecting an increased volume of loan modifications across product lines. Overall, the North America consumer banking segment lost $2.2 billion in the fourth quarter. Meanwhile, Citi's securities and banking group lost $10.6 billion, reflecting writedowns on derivatives and securities, including a $4.6 billion downward adjustment on subprime mortgage securities. Citi also wrote down Alt-A mortgages, net of hedges, by $1.3 billion. It wrote down commercial real estate positions by nearly $1 billion. Citi also announced it is splitting its business into two operating units, Citicorp and Citi Holdings. Citicorp will be the company's global universal bank in more than 100 countries. Citi Holdings, described as "non-core" businesses, will be made up of brokerage and retail asset management, local consumer finance, and a special asset pool whose management will focus on managing risks and losses. Citi said management will focus on "value enhancing disposition and combination opportunities" for the Citi Holdings businesses as opportunities emerge.

Mortgage rates will remain below 5% for the first half of this year which will help stabilize home sales and keep a refinancing wave going, according to a consensus forecast by banking economists. "A surge of refinancings is already under way and lower home prices and interest rates will gradually support an increase in home sales," said Bruce Kasman, chief economist at JPMorgan Chase. Mr. Kasman is chairman of the American Bankers Association Economic Advisory Committee, which expects the government's efforts to stabilize the financial system and stimulate the economy will lead to a recovery in the second half with gross domestic product rising to 3.8% in the fourth quarter of 2009. However, the bank economists see house prices continuing to fall and mortgage delinquencies rising throughout 2009. The refinancing wave will be "substantial," predicted Mr. Kasman, noting that a high rate of applications may be rejected and cash-out refis will be modest.

The Senate late Thursday voted down a resolution, sponsored by Sen. David Vitter, R-La., that would have denied the new Obama administration access to the remaining $350 billion in Troubled Asset Relief Program funds. The resolution was rejected by a 52-42 vote. The defeat clears the way for president-elect Barack Obama to use the TARP funds to inject capital into banks, guarantee bad assets and implement foreclosure prevention programs. Meanwhile, on Thursday government officials worked out a deal to invest another $20 billion of taxpayer money in Bank of America, which over the past six months acquired two of the biggest players in subprime: Countrywide Financial, the nation's largest subprime lender/servicer, and Merrill Lynch, the investment banking firm that financed and then invested in several subprime originators. Merrill, which BoA bought in early January, securitized billions of dollars in subprime loans, selling the end bonds in the form of asset-backed securities and collateralized debt obligations. Merrill also invested in CDOs itself, investments that are now on the books of BoA.

The Federal Reserve purchased $23.4 billion of GSE mortgage-backed securities for the week ending January 14 -- nearly double the previous week's amount. The Fed kicked off its $500 billion campaign to buy Fannie Mae, Freddie Mac and Ginnie Mae MBS on Jan. 2, purchasing $10.2 billion in MBS during that week. Meanwhile, the two-week buying spree is having its intended effect of driving down mortgage rates. According to a recent survey by Freddie Mac, 30-year FRMs are now being offered below 5%, depending on the points. Separately, Rep. Patrick Murphy, D-Pa., wants the Fed to provide "detailed information" about its hiring of four investment managers to run the MBS purchase program. During debate on a Troubled Asset Relief Program bill, he expressed concerns about conflicts of interest. The Treasury Department also remains active in the MBS market. It purchased $21.8 billion in Fannie and Freddie MBS in December after purchasing $23.2 billion in November. The Fed reports its MBS purchases weekly while Treasury reports its MBS purchases monthly.

The $825 billion economic stimulus package drafted by House Democratic leaders will restore the $729,750 GSE loan limit in high cost areas until year-end 2009. The package also includes a provision that increases the loan limit on Federal Housing Administration-insured reverse mortgages to $625,500 from $417,000 nationwide. Congress originally raised the maximum loan limit on Fannie Mae, Freddie Mac and FHA loans to $729,750 in February 2008 as part of the first stimulus bill. But that provision expired Dec. 31 and the loan limit adjusted downward to $625,500 where it stands today. In addition to raising the maximum loan limit, the House bill expands the definition of high cost areas by allowing regulators to designate wealthy residential communities as "sub-areas" within a metropolitan statistical area. If the maximum loan limit in an MSA is $650,000, for example, the loan limit in the sub-area could be $729,750.

Fannie Mae and Freddie Mac have been directed by their regulator to record -- beginning in 2010 -- identification numbers for loan officers, appraisers and others involved in originating mortgages they purchase in the secondary market. The names of these origination professionals will not be recorded and instead each will be given a number under a new national registry for mortgage professionals. Requiring "identifiers" will allow the GSEs to "monitor performance and trends of their loans," said Federal Housing Finance Agency director James Lockhart. "If originators or appraisers have contributed to the incidences of mortgage fraud, these identifiers allow the enterprises to get to the root of the problem and address the issues." A nationwide licensing and registry system that goes into effect June 30 requires all loan officers and mortgage brokers to have a unique identification number. But the GSE regulator is taking it a step further by insisting on appraiser identifiers. FHFA maintains it is important to detect negligence and fraud. In addition, Fannie and Freddie will be changing their systems to collect loan originator and company identifiers. "Simultaneously implementing collection of appraiser identifiers would be reasonable and practical," the agency said.

As the refinancing boom gathers steam selected residential funders are beginning to charge "rate lock" fees to both consumers and loan brokers, according to industry participants. One mortgage executive, requesting anonymity, said his current servicer, Chase of Iselin, N.J., wanted to charge him 50 basis points to lock in a low rate on his refinancing. He passed on the offer. A call to Chase's 800-number by National Mortgage News resulted in a ten minute wait, and the representative on the other end of the line would not quote any loan information without the caller filling out a credit report. At least three top ten lenders contacted by this newspaper -- Bank of America, Wachovia, and Wells Fargo -- said they do not currently charge lock-in fees for retail applicants. Marc Savitt, current president of the National Association of Mortgage Brokers, said he has heard stories about wholesalers charging brokers a fee to lock in but has not seen anything in print. (For the full story see the Monday, January 19 edition of NMN.)

An expert in real estate finance said a lack of liquidity remains the major obstacle to a recovery in the commercial real estate markets at least until the end of this year. "We will also see a curtailed supply of new construction, more focus on cash flow, new incentives for tenants, greater equity required of borrowers and increased government regulation," said Stan Ross, chair of the University of Southern California's Lusk Center for Real Estate. Citing retail bankruptcies, bank closures, greater unemployment and an oversupply of office space, he does not see commercial or residential real estate markets starting to recover-and then only slightly-until the fourth quarter of 2009 with another full year before they grow again. Among the problems facing property owners are declining cash flows and debt coming due that cannot be refinanced while credit is scarce. "Borrowers can still avoid foreclosure with creative restructuring, giving the lender an equity position in return for a lower interest rate or getting a temporary moratorium on principal payments," Mr. Ross explained, pointing out that borrowers should demonstrate a willingness to take action by selling assets to raise cash or getting new equity investors. But there is an opportunity for well-capitalized opportunity funds to buy distressed assets or debt at a deep discount, he said.

Commercial real estate markets "deteriorated' in most areas of the country, according to the Federal Reserve's Beige Book, which also registered an increase in residential refinancings during December. "Contacts in the Boston District described the commercial real estate market as grim and depressing," the Beige Book says. The Dallas Federal Reserve Bank said that CRE transactions in its district have "ground to a halt." In the previous Beige Book, the Fed said CRE markets had "weakened broadly." Meanwhile, residential real estate markets remained weak. "Reduced home sales, lower prices or decreases in construction activity were noted in most districts," the Beige Book says. However, the New York, Cleveland, Richmond, Chicago, Kansas City and San Francisco district banks saw an increase in residential mortgage refinancings.

House tax writers are proposing to make a first-time homebuyer tax credit more attractive to buyers and provide tax refunds for builders and certain financial institutions that have incurred large losses in 2008, but were profitable in past years. The package also includes a five-year carry-back provision that allows companies to charge off their 2008 losses against their profits going back to 2003. But Fannie Mae, Freddie Mac and companies receiving assistance from the Troubled Asset Relief Program are not eligible for this extended carry-back provision under the tax provisions drafted by House Ways and Means Committee chairman Charles Rangel, D-N.Y. "This package was developed with strong coordination between the House and Senate leaders, president-elect Obama and his economic team," Rep. Rangel said. The tax package removes a repayment requirement on the $7,500 first-time homebuyer tax credit. But it does not increase the tax credit or expand it to all homebuyers as requested by the homebuilders and Realtors. These tax provisions and others will be included in the economic stimulus bill.

To jump start multifamily projects that depend on low-income housing tax credits, the Mortgage Bankers Association and other housing groups are recommending a program that would provide 4.5% financing. "Under our proposal, the Treasury Department would purchase mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae that are backed by loans on properties assisted by the LIHTC program," according to a letter to House and Senate Democratic leaders that are working on the economic stimulus package. Under this approach, "Treasury would agree to purchase the loans at a 4.5% note rate," the Jan. 13 letter says. The eight housing groups, including the National Apartment Association and National Multi Housing Council, point out that many projects to build and renovate affordable rental housing are stalled due to the drop in the value of the tax credits and other market factors. But the low cost financing would "reduce debt service costs" and allow a number of these developments to move forward, create jobs and increase the supply of affordable housing, according to the proponents.

The Mortgage Bankers Association is now supporting the creation of a national mortgage regulator, the group's chief executive John Courson said in a meeting with the SourceMedia Mortgage Group editorial staff. The industry has lost its credibility and its image has been tarnished across the board. To restore that credibility, the industry needs to take bold actions, he declared, and there now is the opportunity for "a do-over." This includes "aggressively" seeking federal regulation of nondepository mortgage lenders. Mr. Courson pointed to the patchwork of state regulatory schemes, noting that there are some states where it is virtually non-existent. There is still room for state regulators, in terms of examinations, audits and enforcement, he said. But there needs to be a federal regulator to set the bar and that bar needs to be set high enough to be credible. Another topic of discussion was the future of the secondary market. Mr. Courson said MBA held a summit that brought together parties across the spectrum of divergent views of what should be done regarding Fannie Mae and Freddie Mac. The result was a paper that Mr. Courson described as a starting point for what to do. It discusses several models but does not advocate any particular one.

Continued writedowns on mortgage trading positions and leveraged loans totaling $2.9 billion pretax contributed "largely" to "disappointing" fourth quarter 2008 results at JPMorgan Chase, but the company also noted that there also were some positive mortgage-related developments during the period. The company produced $702 million in net income during the quarter, a result chairman and chief executive Jamie Dimon said was "very disappointing" and "driven by a loss in investment banking largely attributable to continued markdowns on leveraged loans and mortgage trading positions, as well as weak trading results." But the company also noted that it received an $854 million after-tax benefit from mortgage servicing risk management and touted more than $100 billion in "safe and sound lending activities" in areas that included home equity and mortgage. It also said it made "significant enhancements to mortgage modification programs" during the fourth quarter.

The 30-year fixed-rate mortgage averaged 4.96% with an average 0.7 point for the week ending January 15, 2009, representing a decline from 5.01% last week and its first time below 5%, according to Freddie Mac. Last year at this time, the 30-year FRM averaged 5.69%. Similarly, five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 5.25%t his week, with an average 0.6 point, down from last week when it averaged 5.49%. A year ago, the 5-year ARM averaged 5.4% and it has not been lower since the week ending September 8, 2005, when it averaged 5.24%. Also, the one-year Treasury-indexed ARMs averaged 4.89% this week with an average 0.5 point, down from last week when it averaged 4.95%. At this time last year it averaged 5.26%. However, the 15-year FRM this week averaged 4.65% with an average 0.7 point, up from last week when it averaged 4.62 percent. A year ago at this time, the 15-year FRM averaged 5.21%. "Interest rates for 30-year fixed rate mortgages fell for the 11th straight week to another record low, due in part to the slowing economy and government actions," said Frank Nothaft, Freddie Mac vice president and chief economist. "So far, both the U.S. Treasury Department and the Federal Reserve have added over $100 billion in liquidity to the mortgage market since September 2008, which put downward pressure on interest rates for fixed-rate mortgages."

Deutsche Bank reduced its exposure to problematic commercial real estate loans to less than half its previous size in the fourth quarter of 2008, but it still estimates it will take a 4.8 billion euro ($6.3 billion) after-tax loss for the period from other writedowns. The German company said its commercial real estate loans (held on a fair value basis, net of risk reduction) had declined to less than 3 billion euros (less than $3.9 billion) by the end of the fourth quarter from 8.4 billion euros ($11.1 billion) at the end of the third. Deutsche Bank said its preliminary loss estimates for the fourth quarter "reflect exceptional market conditions, which severely impacted results in the sales and trading businesses, most notably in credit trading including its proprietary trading business, equity derivatives and equities proprietary trading." It said the loss "also reflects exposure reduction and other de-risking measures, a significant increase in provisions against certain of our monoline counterparties, and certain other exceptional gains and charges, including reorganization charges."

The Market Composite Index, an overall measure of mortgage applications, increased 15.8% on a seasonally adjusted basis to 1324.8 from 1143.8 during the week ended Jan. 9, according to the Mortgage Bankers Association's Weekly Mortgage Applications Survey. On an unadjusted basis, there would have been a 95.7% increase compared with the previous week and when compared with the same week one year earlier the index would have increased by 52.4%. The Purchase Index decreased 14.1% to 295.8 from 344.2 one week earlier on a seasonally adjusted basis, while the Refinance Index increased 25.6% to 7414.1 from 5904.5. Refinancings increased to 85.3% of applications from 79.8% the previous week, while adjustable-rate mortgages accounted for 1.1% of applications, up from 0.9% for the previous week, the MBA said. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.89% from 5.07%, with points (including the origination fee) increasing to 1.2 from 1.16 for loans with 80% loan-to-value ratios, the association reported. The MBA can be found online at http://www.mortgagebankers.org.