The Making Home Affordable Modification Program (HAMP) adds another layer of uncertainty for private label securitization investors, making it more difficult to predict cash flows, according to a report by analysts at Amherst Securities Group, who added they expect relatively few HAMP workouts to be successful.

Additionally, it’s taking longer for bad mortgages to move from last payment to liquidation, and the pace varies by servicer: “The trial modification period essentially holds the loan in a suspended state for 90 days, making it difficult to assess what is happening with modifications,” the report said, resulting in relatively little cash reaching investors.

Contributing to the delay in liquidation is the growth of re-performing loans — those that were 60 or more days delinquent that now aren’t because the borrower receives a modification or other loss mitigation action is taken — in mortgage backed securitization (MBS) pools.

Of the $1,583bn in private label securitizations, $991bn are always performing, $474.8bn are non-performing (60+ days delinquent), and $117.5bn are re-performing. While the re-performing bucket is growing, it is also unstable, Amherst said. In September, $13.6bn (11.3%) of the re-performing loans transitioned to non-performing, and a roughly equal amount of the non-performers $11.5bn (2.5%) became re-performers.

The cycle between the non-performing and re-performing loans includes both subprime and prime loans, Amherst said. “The behavior of re-performers is weak, no matter from which bucket they are taken.”

In addition the overall size of the re-performing bucket may be understated because it does not include loans in modification limbo during the HAMP-mandated three-month trial period. The research warns the pool of modified loans is also expected to increase, as recent and proposed changes to HAMP regulations are making the program more widespread to include ever growing numbers of distressed borrowers.

One such change is the proposed Senate Bill 1731, the Foreclosure Prevention and Assistance Act of 2009, which would require loan servicers to determine if a distressed borrower is eligible for a modification before beginning the foreclosure process.

But in order for the servicer to make that determination, the servicer must make contact with the borrower to verify employment and income information. If the servicer can’t contact the borrower, the foreclosure can’t proceed. This differs from HAMP, a voluntary program that lets a servicer continue the foreclosure process if contact can’t be met.

“At the minimum, the consequence of S. 1731 is that there will be a longer time between last payment and foreclosure. At worst, S. 1731 may suspend the foreclosure process indefinitely for many borrowers,” the report said.

While HAMP workouts are keeping the pools of real estate owned (REO) property relatively small, Amherst predicts a low percentage of eventual success of HAMP modifications is inevitable.

“When HAMP is less successful than hoped, and the reality of the housing overhand hit the market – we would expect to see further governmental action,” the report said, noting the most likely course of action is a plan that contains principal forgiveness.

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The House of Representatives is considering a bill that requires advisers of certain unregistered investment companies to register with and provide information to the Securities and Exchange Commission (SEC).

The bill will apply to major real estate investment firms, as well as private equity houses and hedge funds, with more than $30m in assets under management, according to analytics provider, the Private Equity Council.

The Private Fund Investment Advisers Registration Act of 2009, introduced by Rep. Paul Kanjorski (D-PA), would amend the Investment Advisers Act of 1940 and would require advisers to disclose to the commission the amount of assets under management, the use of leverage, counterparty credit risk exposure, trading and investment positions, trading practices and any other information the commission determines is necessary “for the protection of investors or for the assessment of systemic risk.”

The bill has a confidentiality clause that protects the investment companies’ proprietary information. It also provides an exemption from registration for venture capital fund advisers.

Investment advisers are the latest the possibility of federally mandated registration. A Senate bill introduced in June called for similar regulations on investment advisers. Under the recently passed federal Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act, requires all states have a loan originator registration system.

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The Mortgage Bankers Association (MBA) released a model sale and servicing agreement form for lenders to use when buying and selling whole loans with the intent of selling to the securitization market.

MBA said the form provides standard formatting and text and using it will reduce the time, effort and cost of legal and due diligence reviews, and increase liquidity and efficiency in the non-conforming residential mortgage market.

“At the current time, there is virtually no private label [mortgage backed securitization] market to speak of," said MBA president and CEO John Courson. "When the market begins to return, we expect it will start with whole loan transactions. This model agreement will provide consistency and transparency to help investors get a better understanding of the whole loans they are purchasing.”

A work group in the MBA’s secondary and capital markets committee drafted the form after a review of existing whole loan servicing agreements. A draft was released in July for public review and comment, and the final document incorporates that feedback.

“The model agreement was drafted by members, for members and with significant input from a wide variety of stakeholders,” Courson said. “Plus, we've developed protocols so that the agreement reflects standard practices and legal requirements both now and in the future.”

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The UK subsidiaries and branches of a number of global banking firms agreed to implement the new compensation reforms called for at the Group of Twenty(G20) Pittsburgh meeting at the end of September, according to Paul Myners, a secretary at the country's regulatory body, the Financial Services Authority (FSA).

Bank of America Merrill Lynch, Citigroup, Credit Suisse, Goldman Sachs International, JP Morgan Securities, Morgan Stanley, Nomura and UBS, as well as EU banks with major London branches, BNP Paribas, Deutsche Bank and Société Générale confirmed their participation in the Financial Services Authority (FSA) rules on pay that dictate how and when bonuses can be paid.

“The financial services industry must take a responsible and long-term approach to remuneration if it is to retain its competitiveness and regain public trust,” Myners said.

The changes come as a result of public and political outcry against banking firms that paid bonuses to employees when they were recipients of government bailouts.

Write to Austin Kilgore.

The commercial mortgage-backed securities (CMBS) continued to post positive excess returns for the seventh consecutive month in September, according to Barclays Capital analysts.

As the rally matures, investors continue to move out of the risk spectrum and toward investment-grade junior notes. But analysts continue to see better risk-adjusted returns in some senior triple-As and remain cautious across the CMBX [the CMBS pricing index]subordinate tranches, even though they outperformed their cash counterparts steeply in September.

But some commercial real estate (CRE) losses on souring mortgages still pose a threat to financial institutions, and banking regulators are planning to issue guidelines helping lenders modify CRE loans – a potential blow to the CMBS market because investors are forced to absorb the hit on modifications.

"The most prominent area of risk for rising credit losses at FDIC-insured institutions during the next several quarters is in [commercial real estate] lending," Sheila Bair, chairwoman of the Federal Deposit Insurance Corp. (FDIC). "Prudent loan workouts are often in the best interest of financial institutions and borrowers."

Leaders of the FDIC, the Office of the Thrift Supervision (OTC) and the Office of the Comptroller of the Currency (OCC) will testify on the situation before the Senate banking committee today.

The Internal Revenue Service has already released two pieces of guidance last week addressing the types of modifications for commercial mortgage loans held by real estate mortgage investment conduits (REMIC).

Write to Jon Prior.

As regulators and market participants alike underestimated the interconnectedness of the financial system contributing to the current recession, tougher risk management is now needed at those firms in the form of strengthened capital requirements in order to prevent a repeat of events, according to William Dudley, the president and CEO of the Federal Reserve Bank of New York.

Dudley made the announcement while speaking to the Institute of International Bankers on the need to improve the capital standards for interconnected financial institutions.

Dudley called for a complete risk capture to insure capital adequacy rules that cover a broader set of risk exposures than before the financial crisis. He also wanted to draw rules to encourage the conservation of capital in tough financial circumstances and tougher regulatory requirements that implement the use of a contingent capital instrument, automatically injecting equity capital in times of stress.

“This interconnectedness implies that regulation and risk management practices that focus only on individual parts of the system will inevitably fail to address important vulnerabilities elsewhere,” Dudley said.

The new policies, Dudley said, need to require vulnerable firms to cut dividends in order to conserve capital.

Dudly said that the new capital framework needs to improve the risk capture not appropriately watched in recent years, and new rules need to be introduced, requiring higher capital for systemically important institutions. Dudley also called for the development of efficient forms of capital, particularly contingent capital debt instruments that would convert into equity if the bank’s share price fell steeply.

“In thinking about the best way to introduce these practices into our system, we should not kid ourselves about how difficult this will be to execute,” Dudley said.

Write to Jon Prior.