Originations

Suitability standards could open up lenders to a fair-housing can of worms, a compliance expert said Monday at the SourceMedia Fraud and Risk Conference in Las Vegas.According to Gary Lacefield, who spent a decade as a senior civil rights analyst and supervisor of lending investigations at the Department of Housing and Urban Development, lenders will "need to be very cautious" if legislators and regulators impose true suitability standards on the mortgage business. "If we do away with automated underwriting," he asked, "how are we going to protect ourselves from frivolous charges of discrimination?" Mr. Lacefield, who left HUD in 1999 after personally supervising or conducting more than 1,600 investigations, said automated underwriting was created in large measure in the mid-1990s to protect lenders from charges of bias. And it worked. Once computer systems started spitting out loan approvals based solely on lenders' underwriting criteria, without being touched by humans and their inherent biases, they all but wiped out fair-housing cases against lenders, he said. But if suitability standards are imposed as a response to abusive lending practices, Mr. Lacefield, who is now director of compliance at WR Starkey Mortgage, Plano, Texas, said automated underwriting would be little more than an exercise in futility. "If we take out the specificity provided by automated underwriting, we leave ourselves wide open to allegations of discriminatory behavior," he warned.

A "tough" predatory lending bill that Sen. Christopher J. Dodd, D-Conn., planned to introduce Tuesday would impose a fiduciary duty on mortgage brokers and address lending, servicing, and appraisal abuses.Sen. Dodd's bill prohibits yield-spread premiums (which are a broker's main form of compensation) on subprime and nontraditional mortgages such as interest-only and payment-option adjustable-rate mortgages. Lenders would be responsible for faulty appraisals and be required to adjust the mortgage where an appraisal exceeds the market value by 10%. Servicers would be required to publicly report their loss mitigation activities under the bill, which also prohibits servicers from "pyramiding" late fees to generate additional income. Mortgage industry groups are expected to raise strong objections to the bill, which creates new lending standards but does not pre-empt state laws. Under the Dodd bill, homeowners with improperly underwritten loans can go directly to the holder of the mortgage (assignee) to seek a cure or rescission of their loan. Their attorneys can also seek $5,000 in statutory damages, but cannot pursue class actions against assignees. State attorneys general also have certain enforcement powers.

Tax preparation giant H&R Block lost $502 million in its fiscal second quarter, blaming the poor performance on its discontinued subprime unit, Option One Mortgage of Irvine, Calif.Block is now trying to sell Option One's $62.3 billion servicing business after a deal to sell the entire company to hedge fund giant Cerberus Capital fell apart. By discontinuing Option One's operations, Block took a total pretax loss of $551 million. Included in that number is a $252 million loss on the sale of $3 billion in whole loans. It also lost $123 million due to mortgage-related impairment charges tied to mortgage and servicing assets.

Washington Mutual, once a powerhouse in the mortgage industry, says it will trim 22% of its home loan staff, eliminate its subprime channel, and take a whopping $1.6 billion writedown in the fourth quarter.On Monday afternoon the nation's largest thrift also said it would raise $2.5 billion in new capital through a convertible preferred offering and slash its dividend by 73%. The Seattle-based WaMu said it remains committed to the mortgage business but noted that the industry is undergoing a "fundamental shift due to credit dislocation and a prolonged period of reduced capital markets liquidity." In total, it is eliminating 3,150 jobs, including 2,600 in its mortgage group. As previously reported, it is also closing its warehouse division. In response to the latest announcement, Fitch Ratings downgraded the long-term issuer default ratings of WaMu and Washington Mutual Bank from A to A-minus, and downgraded various other ratings of WaMu and its subsidiaries. In trading Tuesday morning, WaMu's stock was down 9% to $19.88 a share.

Mt. Arlington, N.J.-based NYLX has launched NYLX Exchange, a real-time information source on aggregated loan origination activity in the United States.NYLX is a provider of point-of-sale product eligibility and loan pricing technology systems. The new tool provides market information resulting from billions of dollars worth of originations that pass through the NYLX system each day. Furthermore, the exchange offers an information source for lenders, investors, and originators along with competitive information on the products and investors that are generating activity. The company said NYLX Exchange gathers and evaluates NYLX members' aggregate activity, providing originators, lenders, and secondary-market professionals with easily accessed real-time insight into origination activity, including daily market activity, the most active investors, the most active loan products, competitive intelligence, and specific investor information. Users can even find out critical competitive information on how other companies and mortgage products are trading. The company can be found on the Web at http://www.nylx.com.

A UBS Securities economist says he expects prices of existing homes to decline 15% before the housing market recovers and that prices could fall even further if excess supplies are not quickly reduced.UBS Securities economist Maury Harris noted that house prices have declined by 5% already and said he expects another 10% decline because of the tightening of mortgage credit and surging foreclosures. These "unprecedented" factors are making it "unusually difficult" to reduce the large inventory of unsold single-family homes, including a 5.1-month supply of vacant properties. "Unless excess supplies are quickly reduced," home prices could fall by 20%, he said. Last year, Mr. Harris forecast a 10% decline in home prices from peak to trough.

Economists at the National Association of Realtors see existing-home sales stabilizing in the near term and gradually rising over 2008 to end the year with 5.7 million in total sales -- up slightly (0.5%) from this year's pace."Now that the mortgage market conditions have improved, some postponed activity should turn up in existing homes over the next couple of months, and I expect sales at fairly stable to slightly higher levels," NAR chief economist Lawrence Yun said in releasing the 2008 forecast. He noted that the 12.5% dropoff in sales in 2007 largely reflects the meltdown in subprime lending, and he said he expects a pickup in Federal Housing Administration lending that will help sales in 2008. Mr. Yun says he also expects the jumbo mortgage market to improve, although he pointed out that the spread on jumbos over conforming mortgages has widened again. The NAR also expects prices of previously owned home to stabilize and show a slight increase of 0.3% for 2008, compared with the 1.9% decline this year. The NAR can be found online at http://www.realtor.org.

The default rate on subprime mortgage loans jumped nearly 160 basis points in September to a new record high of 17.73%, and the foreclosure rate jumped 47 bps to 7.24%, according to a Friedman Billings Ramsey Investment Management report.Defaults on securitized subprime mortgages had doubled over the previous 12 months. For the first time since the 2001 recession, "the majority of metropolitan statistical areas are experiencing year over year increases in default rates in each of prime, Alt-A and subprime loans," Michael Youngblood, FBRIM's managing director of fixed-income research, says in the report. The researcher points out that default rates in 52 MSAs, representing 46% of all subprime loans, had increased by 200% or more in September 2007 from the levels of a year earlier. The 52 MSAs are concentrated in Arizona, California, Florida, Nevada, Oregon, and the District of Columbia. The default rate on alternative-A loans moved up from 3.96% in August to 4.61% in September. FBRIM is a subsidiary of Friedman Billings Ramsey, which can be found online at http://www.fbr.com.

United Bank of Switzerland -- once a huge provider of warehouse credit to subprime firms -- says it will take a $10 billion writedown on collateralized debt obligations that are triple-A rated even though these investments are "senior" to similarly rated tranches of the same bond issue.UBS -- which released the news at 1 a.m. Monday -- blamed the writedown on America's subprime crisis, homeowner delinquencies, and "worsening market expectations of future developments." In tandem with the writedown announcement, UBS said two foreign investors have committed to invest $11.5 billion in the company to help shore up its capital position. UBS is based in Zurich. One of the investors in the Swiss bank is the Government of Singapore Investment Corp., or GIC.

NNN Realty Advisors, a commercial real estate asset management firm based in Santa Ana, Calif., has announced the acquisition of a majority interest in Alesco Global Advisors, a registered investment adviser that focuses on real estate securities.Alesco plans to launch and manage a family of U.S. and global real estate mutual funds, separate accounts, and hedge funds, NNN Realty Advisors said. Jay P. Leupp, the founder, managing principal, and senior portfolio manager of Alesco, will serve as Alesco's chief executive officer and president and as an executive vice president of NNN Realty Advisors. Before launching Alesco, Mr. Leupp was managing director of real estate equity research at RBC Capital Markets. NNN Realty Advisors, the parent company of Triple Net Properties LLC, Triple Net Properties Realty Inc., and NNN Capital Corp., can be found online at http://www.1031nnn.com.

Crosland LLC, a Charlotte, N.C.-based real estate company, is forming an investment fund with life insurance company Northwestern Mutual with a development potential of about $1.5 billion.The fund will deploy about $225 million toward land acquisition and make additional mixed-use developments on the lands, Crosland reported. Residential, retail, office, and mixed-use developments will be pursued. The land acquisition will be focused on "urban infill redevelopment as well as outlying growth corridors," Crosland said. The fund is managed by Jamie Dunn, Crosland's vice president for investments, and Perry Reader, Crosland's Florida division president.

Meanwhile, Fitch Ratings responded favorably to the securitization industry's loan modification plan backed by the Bush administration, declaring that it can help reduce the risk of principal loss on subprime residential mortgage-backed securities.Under the voluntary program, mortgage servicers can identify loans that are "good candidates for refinancing" as well as loans that "might be eligible for a 'streamlined' modification process" consisting of a five-year rate freeze, Fitch noted. "Fitch Ratings believes that on balance, by mitigating the impact of [adjustable-rate mortgage] resets on borrower default rates, the framework can help to reduce the risk of principal loss on senior subprime RMBS," the rating agency said. "Increased refinancing opportunities via [the Federal Housing Administration] and other programs are also important to stabilizing default rates. The implications for subordinated RMBS classes are unclear, as they may be exposed to a complex interaction of variables that can be difficult to analyze." Fitch can be found online at http://www.fitchratings.com.

Loan modification plans that would simply freeze interest rates on some U.S. subprime mortgage loans may impair the ratings of certain residential mortgage-backed securities, according to Standard & Poor's.In a report outlining its views on a rate freeze, S&P said it supports "appropriate loss mitigation strategies" to prevent foreclosures, but that some loan modification proposals may have negative effects. "By extending the initial interest rate that homeowners paid during the fixed-rate period of their hybrid ARM loan terms, the potential for payment shock may be mitigated, thereby potentially reducing the risk of default," S&P said. "However, there may be a corresponding reduction in excess spread that was initially incorporated into our ratings analysis.... [which] may offset the benefits of lower defaults, resulting in diminished investor protection." Loan modifications may also discourage investors from participating in the first-lien subprime securitization market by reducing the payments they receive, S&P said. "The consequences of declining investor participation include reduced capital and liquidity available for homeowners and lenders, which may negatively affect home ownership rates and borrowing opportunities to creditworthy borrowers," S&P said. The rating agency can be found online at http://www.standardandpoors.com.

To deal with a large volume of loan modifications, the Mortgage Bankers Association is asking the Financial Accounting Standards Board for relief from its rules for evaluating credit impairment on hundreds of thousands of subprime adjustable-rate mortgages.The MBA has endorsed President Bush's plan to freeze the resets on subprime ARMs. However, its members maintain that they don't have the systems capacity to evaluate loan impairment under Financial Accounting Standard No. 114 on a loan-by-loan basis and would like to use FAS 5 instead. "FAS 5 provides for a cost-effective approach to accurately measuring probable credit losses on large volumes of loans, which is consistent with the objective of a loan modification, which is to reduce the prospect of future credit losses," the MBA says in a letter to FASB. Separately, the Internal Revenue Service has issued a ruling that it will not challenge the tax status of real estate mortgage investment corporations if servicers follow the American Financial Services guidelines for freezing resets on subprime ARMs. The MBA can be found online at http://www.mortgagebankers.org.

SBMC Mortgage, a privately held nondepository based in Van Nuys, Calif., stopped funding residential loans on Friday, citing "market forces."Company president Lance Tendler posted a letter on the company's website, informing customers that it is closing offices in Bothell, Wash., and four cities in California: Fresno, Tustin, Van Nuys, and San Diego. "Staffing levels will be maintained in the Van Nuys location through approximately February 7, 2008 to facilitate the winding down of the operation," Mr. Tendler wrote. He called it a "painful decision" to halt originations. "For more than 15 years SBMC Mortgage was a sustainable community that reflected the positive values of integrity, hard work, honesty, respect and friendship," he said. "Unfortunately, the market forces are no longer in alignment to allow us to continue." SBMC was ranked #93 among mortgage originators by the Mortgage Industry Directory.

Employment in the mortgage industry appeared to stabilize in October as lenders cut their work force by 1,600 positions after purging their payrolls of 25,600 full-time employees in September.The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector declined from 403,100 in September to 401,500 in October. Since February (the high point in mortgage employment this year), the industry's work force has been reduced by 18%, and 88,300 employees have lost their jobs. There is a one-month lag in breaking out the mortgage banker/broker sector data. But Friday's jobs report points to more job losses when next month's report is released. BLS acting Commissioner Philip Rones said employment in credit intermediation declined by 13,000 in November, "reflecting weakness in housing and mortgage lending." The BLS can be found online at http://stats.bls.gov.

New York City has announced the launch of The Center for NYC Neighborhoods, a not-for-profit organization created "to assist homeowners at risk of mortgage foreclosure throughout the five boroughs."Its projected first-year budget of $5.3 million is expected to assist 18,000 New Yorkers. According to city officials, it will be the largest program of its kind in the nation. Mayor Michael R. Bloomberg and New York City Council Speaker Christine Quinn announced that funding in the first year includes $1 million from the administration via the Department of Housing Preservation and Development and $1.8 million from the City Council. In addition, the city said the program planning committee is seeking philanthropic support, which is expected to provide the remainder of the funds from private and foundation sources. The program will operate as an independent entity dedicated to "a major expansion and coordination" of counseling and referral services, legal assistance, loan remediation, preventive outreach, and education, training, research, and advocacy around subprime lending and mortgage foreclosures.

First Industrial Realty Trust, a Chicago-based real estate investment trust, has expanded its joint venture with the California State Teachers' Retirement System to $1.6 billion from the $950 million capacity originally planned in 2006.The venture invests in land and developments in markets that are seen as benefiting from developments such as "supply chain reconfiguration, international trade, demographic trends, and economic expansion." The venture invests across North America and has an initial term of up to 2016, the REIT said. CalSTRS has put in an additional $200 million in equity, making for a 90% equity interest in the venture, and the REIT has put in an additional $22 million, First Industrial reported. New credit facilities of $500 million have been obtained from WestLB AG, the lead lender on the transaction. The target for the venture is to use 35% equity funding and 65% debt funding. The REIT is managing the venture and receiving management fees.

Related Cos., New York, has announced a joint venture with former football star Tiki Barber aimed at increasing the nation's stock of high-quality affordable housing.The new company, Tiki Ventures, will partner with Centerline Capital Group to purchase and extensively renovate older affordable housing developments, Related said. The first phase of the venture will consist of the acquisition and refurbishment of over 3,500 residential units for low- to moderate-income families in Virginia and North Carolina. Centerline will finance approximately $150 million of the project. "Related has been at the forefront of affordable housing development for 35 years, and this venture continues this legacy," said Stephen M. Ross, chairman of Related and Centerline. Mr. Barber, formerly a running back for the New York Giants, is now a sports broadcaster. The companies can be found online at http://www.related.com, http://www.centerline.com, and http://www.tikiventuresllc.com.

The Federal Reserve Board will issue long-awaited revisions to its Home Ownership and Equity Protection Act regulations in two weeks to address abusive lending practices, a Fed governor has testified.The proposed HOEPA rule will address prepayment penalties, failure to escrow taxes and insurance, stated-income and low-documentation lending, and ability to repay, Fed Governor Randall Kroszner told a congressional panel. The Fed will also propose changes to its Truth in Lending Act rules to require "earlier disclosures by lenders and to address concerns about misleading mortgage loan advertisements," he testified.