Archive for April, 2011
Recent consent orders over foreclosure issues signed between Citigroup (C: 30.39 +0.03%), the Office of the Comptroller of the Currency and the Federal Reserve will end up costing the bank between $25 million and $30 million annually.
The bank said the real hit will come from a new Federal Deposit Insurance Corp.'s rule that requires banks taking on more risks with their investments to pay out more for insurance. The new FDIC rule will be a $550 million annual hit, Citi CEO Vikram Pandit estimated.
Federal regulators signed agreements with Citi and 13 others — mainly mortgage servicers — last week, including Bank of America (BAC: 7.225 -1.03%), JPMorgan Chase (JPM: 37.26 -0.61%) and Wells Fargo (WFC: 29.355 +1.05%) after an investigation into breakdowns and mismanagement in their foreclosure processes.
The banks will submit plans to regulators over the next 60 days, regarding how they will implement new requirements to establish a single point of contact for homeowners, ensure foreclosures are not pursued once a modification is approved, and provide remediation to borrowers who received a wrongful filing, among other requirements.
"As we've looked at the impact, we've estimated it'll have a $25 million to $30 million annual increase in expenses for us. So, it's not that much," Citi Chief Financial Officer John Gerspach said in a conference call with investors Monday.
Negotiations between the 50 state attorneys general and the lenders continue over a separate investigation into foreclosure issues.
Pandit said the FDIC's issued a final rule that took effect April 1 will be a much costlier hit than the consent order. It requires banks taking more risks with their investments to pay more for insurance costs. The FDIC said larger institutions that pose a higher risk to the financial system will end up paying more.
"New FDIC assessments to cost Citi $550 million annually," Pandit said.
Increased servicing costs at BofA reached $1 billion over the last two quarters, according to the bank. And JPMorgan Chase reduced the value of its mortgage servicing rights by roughly $1.2 billion due to the new agreements.
But Citi's Gerspach said its current cap rate on its mortgage servicing rights would see little effect. It currently stands at 1.15%, or $4.7 billion of a more than $430 billion mortgage servicing portfolio.
"We don't expect it to have that much impact on MSR assets," Gerspach said.
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Tags: Bank of America, CFO, Citigroup, consent orders, FDIC, Federal Reserve, foreclosure, JPMorgan Chase, mortgage, OCC, Wells Fargo
Posted in Servicing/Default, Top Stories | No Comments »
Ginnie Mae will require issuers of reverse mortgage-backed securities to pay servicers based on a basis point strip of the interest beginning this summer.
The requirement, which takes effect July 1, essentially ends paying a flat fee for the servicing of these loans. Ginnie guarantees the timely payment of principal and interest to investors on government-backed MBS, mostly those insured by the Federal Housing Administration. Approved lenders also securitize Ginnie-backed HECM, or reverse mortgage-backed securities through its HMBS program.
The current servicing compensation method allowed the issuer to choose between a flat servicing fee of between 6 and 25 basis points or a strip of the interest of between 25 and 75 bps.
According to the requirement sent to issuers last week, however, the only option available is the basis point servicing strip fee of between 36 and 150 bps. This includes a 6-bps Ginnie Mae guaranty fee.
Fannie Mae, Freddie Mac and their regulator, the Federal Housing Finance Agency, are at work revamping how servicers of forward mortgages will be paid. Since the '8os, the method had been a flat 25 bps servicing fee, but as foreclosures began to mount after the financial crisis, the model quickly became obsolete.
New guidelines for the forward mortgage servicing fees are expected this summer, though some trade groups, including the Mortgage Bankers Association, have asked for more time.
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Tags: Fannie Mae, FHA, FHFA, freddie mac, Ginnie Mae, MBA, mortgage, reverse mortgage, Servicing/Default
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The Federal Deposit Insurance Corp. retraced the government's steps in the wake of the financial crisis and concluded provisions of the Dodd-Frank Act could have lessened the blow from the 2008 collapse of Lehman Brothers.
The investment bank, which was heavily tied to risky mortgage-backed securities, collapsed in 2008, rocking global financial markets for months.
Sheila Bair, head of the FDIC, released a report Monday, saying an orderly liquidation of the bank under guidelines now in effect after the passage of Dodd-Frank could have prevented the shock of a full-blown Lehman's bankruptcy by allowing the FDIC to sell the bank's valuable assets at no cost to taxpayers.
The FDIC report "estimates that given the substantial, though declining, equity and subordinated debt of Lehman in September 2008 and the power for the FDIC to implement a prompt structured sale while providing short-term liquidity to continue value-adding operations, general unsecured creditors could have recovered 97 cents on every $1 of claims, compared to the estimated 21 cents on claims estimated in the most recent bankruptcy plan of reorganization."
The FDIC said a quick liquidation of Lehman Brothers would have been difficult, but far superior to the shock that eventually hit creditors, taxpayers and the overall financial system.
"The Lehman failure provides an excellent model to contrast the tools available to the FDIC to effectuate an orderly resolution of a large financial institution against the process used in bankruptcy which, unlike our process, is not specifically designed to deal with the failure of a financial entity," Bair said Monday.
Christopher Whalen, co-founder of Institutional Risk Analytics, said the bankruptcy was handled as best it could have been at the time.
"The bankruptcy of Lehman Brothers was not a failure at all," he said. Instead, Harvey Miller, the bankruptcy attorney for Lehman Brothers "and the good people of the Southern District of New York did a superb job, as did the other professionals. Dodd Frank would certainly have made the process easier in some respects, but the reality is that we do not know how a resolution would be handled."
Write to Kerri Panchuk.
Tags: bankruptcy, Dodd-Frank Act, Dodd-Frank Wall Street Reform and Consumer Protection Act, Federal Deposit Insurance Corp., Lehman Brothers Holdings Inc., mortgage-backed securities
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The Obama administration said Standard & Poor's decision to lower its outlook for the country's credit underestimates Washington's ability to reach a compromise on the budget.
S&P analysts revised the outlook on U.S. debt to negative from stable, while affirming the triple-A for the world's largest economy and saying there is a chance the rating could be lowered within two years.
Mary Miller, assistant secretary for financial markets at the Treasury Department, said "addressing the current fiscal situation is well within our capacity as a country."
"S&P assumes that the U.S. will enact 'a comprehensive budgetary consolidation program – combined with meaningful steps toward implementation by 2013,' but we believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation," Miller said.
She said President Obama and Republican leaders are "making progress on a balanced approach to restoring fiscal responsibility," and both parties now agree "it is time to begin bringing down deficits as a share of GDP."
"Democrats and Republicans are playing a game of chicken, with the stances they’ve taken on what they refuse to cut," according to Garett Jones, an economics professor at George Mason University in Fairfax, Va. "If both sides swerve early, bond holders will see this as good news. Waiting to the last minute will make bond holders nervous, because they'll think it could happen again, and then again, until maybe there’s a crash."
Also Monday, Moody's Investors Service said the evolving parameters of the deficit debate now show both sides of the aisle agreeing on debt levels, which is "a turning point that is positive for the long-term fiscal position of the U.S. federal government."
Just like some other market analysts, Toronto-based Capital Economics wondered about the timing of S&P's announcement.
"Given the size of the U.S. federal deficit, which will be close to 10% of GDP this year, and the daunting medium-term fiscal challenges, it is hard to argue with S&P's decision to put a negative outlook on the country's AAA credit rating," Capital Economics said.
"Nevertheless, at a time when the politicians on both sides have finally started to talk seriously about a meaningful deficit reduction, we find the particular timing of this move a little strange. If the rising risk of a downgrade gives the fiscal austerity debate a greater sense of urgency, however, then it might even turn out to be a positive development."
Write to Jason Philyaw.
Tags: Capital Economics, debt rating, Fannie Mae, freddie mac, Moody's Investors Service, Obama administration, Standard & Poor's, Treasury Department
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The United States' quantitative easing policy did not impact Standard & Poor's decision to place the sovereign rating on negative outlook, but its conservatorship of Fannie Mae and Freddie Mac certainly did.
One of the pressures on the credit is analysts' estimate that it could cost the U.S. government up to "3.5% of GDP to appropriately capitalize and relaunch Fannie Mae and Freddie Mac" in addition to the 1% of GDP already invested.
S&P analysts said the government may have to inject as much as $280 billion into the government-sponsored enterprises, which includes $148 billion already spent, to cover losses at the housing finance companies that were put into conservatorship in September 2008.
"By our estimates, that $280 billion could swell to $685 billion if the government capitalizes Fannie and Freddie on a commercial basis," S&P said.
S&P's $280 billion projections for Treasury GSE support is primarily based on losses from the guarantee business, writes Margaret Kerins, a GSE credit strategist at the Royal Bank of Scotland (RBS: 8.64 +0.35%) in a quick reaction note to clients Monday. The $685 billion is based on the government replacing Fannie Mae and Freddie Mac and proving the capital for the successor entities.
"We think that this outcome is highly unlikely as it implies a government-owned entity with the taxpayers bearing the cost of capitalization," she wrote. "The majority of the housing finance proposals seek to limit government support and the cost to the taxpayers."
S&P added that it does not expect the United States to default on any debt obligations.
Furthermore, other economic activities of the federal government during the downturn, such as the implementation of quantitative easing, is to the country's credit, S&P stated.
"We find that risks of deflation in the U.S. have lessened and that there are few indications that inflation expectations have become untethered," the report states. "Although it will be challenging to sequence the unwinding of these operations while raising policy interest rates once the recovery has become firmly rooted, we believe that the credibility of monetary policy will continue to be a credit strength for the U.S."
Follow him on Twitter @JacobGaffney.
Tags: Fannie, Freddie, RBS, S&P
Posted in Secondary Market/Investors, Slider, Top Stories | 3 Comments »
Citigroup (C: 30.39 +0.03%) continued to shrink its troubled mortgage portfolio in the first quarter by converting more permanent modifications and selling delinquent loans.
Citi reported $7.8 billion in delinquent first-lien mortgages for the first quarter, a 45% drop from one year ago. The peak came in the third quarter of 2009 when Citi held nearly $17 billion in troubled loans.
Citi Chief Financial Officer John Gerspach said in a conference call with investors Monday the bank sold $1.1 billion in delinquent mortgages during the quarter. CEO Vikram Pandit added that over the last five quarters, Citi sold $10 billion in mortgages from its improving Citi Holdings portfolio. Of that, $6 billion were delinquent loans.
"We continue to actively manage that," Pandit said. "We've been active sellers over the last five quarters."
The bank also converted $5.3 billion in mortgages from trial to permanent modification in the first quarter. More than 75% were done through the Home Affordable Modification Program. Redefault rates in the program, at least on Citi loans, stands at less than 15%, compared to a 25% redefault rate on proprietary mods.
While Citi reported a 32% drop in earnings for the first quarter, it continued to cut its Holdings portfolio to $337 billion. It stands 59% below the $827 billion peak in the first quarter of 2008.
But the door swings both ways. Citi reported $151 million in losses from buying back faulty mortgages from both the government-sponsored enterprises and private entities. The loss is down from $235 million in the previous quarter. Citi even reduced its repurchase reserve balance to $944 million in the first quarter, down from $969 million in the previous period.
Gerspach said while the sales will continue for some time, so will losses from Citi Holdings.
"We're going to continue to wind down Citi Holdings," Gerspach said. "It will be a drain on our income for a while. As we continue to wind down those assets, you're going to see reduced income."
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Tags: Citi, delinquent, GSE, HAMP, modification, mortgages, Pandit, reps and warranties
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The Federal Housing Finance Agency, Fannie Mae and Freddie Mac are developing a Uniform Mortgage Data Program that is expected to use more concise data parameters and consistent language to form a risk detection system that will drill down deeper into mortgage loans to highlight underlying risks early on.
"The concept is simple: better data means better loans," said Patricia McClung, a vice president at Freddie Mac. McClung added, "Creating a common language through data standards that are used and understood by all stakeholders will help us identify potential defects earlier in the mortgage process, improving the quality of our mortgage purchases and reducing repurchase risk for lenders."
McClung in a blog Monday said accurate data remains the missing link in developing a mortgage finance system where risks are alleviated early on to avert a financial crisis for homeowners and the industry.
"Our data shows that loans with data defects – like appraisals that do not support property values and mortgage amounts that exceed maximum loan-to-value ratios – are more likely to become seriously delinquent within the first year," McClung wrote.
In response to data concerns, the government-sponsored enterprises and FHFA are developing new data standards for appraisal and loan delivery first data using the Mortgage Industry Standards Maintenance Organization. MISMO is a nonprofit subsidiary of the Mortgage Bankers Association. The GSEs and FHFA also are developing clear and consistent definitions for appraisal and loan data to ensure the terms are understood industrywide.
McClung believes data standardization will reduce costs and time, giving all parties involved in mortgage finance an opportunity to gauge the true value of the loans originated and purchased early on.
Write to Kerri Panchuk.
Tags: appraisals, Fannie Mae, Federal Housing Finance Agency, FHFA, freddie mac, MISMO, mortgage, Uniform Mortgage Data Program
Posted in Servicing/Default, Top Stories | 3 Comments »
Standard & Poor's changed its outlook on U.S. debt to negative from stable over concerns Congress won't reach an agreement on the country's debt limit. However, another credit rating agency, Moody's Investors Service, disagrees.
S&P analysts affirmed the triple-A rating of the world's largest economy, and said there is a chance the rating could be lowered within two years. The country's ratings strengths include a "high-income, highly diversified, and flexible economy…backed by a strong track record of prudent and credible monetary policy, evidenced to us by its ability to support growth while containing inflationary pressures."
The outlook revision comes as Treasury Department Secretary Timothy Geithner said Sunday that Republicans recently assured the Obama administration an agreement to raise the debt ceiling would be reached. The country is expected to hit its $14.3 trillion borrowing limit in about a month. If Congress doesn't reach an agreement prior to the middle of May, the United States may default on some liabilities.
Standard & Poor's analysts expect the political battle over the budget will continue through this year and into 2012.
"Our negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years," S&P credit analyst Nikola Swann said. "The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012."
Markets fell in early trading Monday following the S&P announcement with the Dow Jones Industrial Average declining nearly 200 points soon after the opening bell.
"The market thought the rating agencies were thinking like the market on a timetable for skepticism on the country's AAA – several years of a grace period after 2009," according to Jim Vogel of FTN Financial. "So, S&P's negative outlook on the obviously not-good state of the U.S.'s fiscal condition comes as a surprise in its random appearance early on a Monday in April 2011."
Also Monday, Moody's Investors Service said a budget accord between the Obama administration and congressional Republicans that lowers the deficit and debt would be a positive for the country's credit rating, according to MarketWatch. Moody's continues to rate the U.S. at triple-A with a stable outlook.
FTN Financial's Vogel questions the agencies ability to truly monitor the debt of a sovereignty.
"We have said several times that sovereign ratings come down to questions of resources (and) national will," Vogel said. "Pessimists have questioned both with regards to the U.S., and S&P's views will recast yet another debate. They shouldn't, because rating agencies really aren't equipped to do sovereign analysis. Yet, markets cannot chose to ignore them, either."
Write to Jason Philyaw.
Tags: FTN financial, Moody's Investors Service, Standard & Poor's, Treasury Department, Treasury Secretary Timothy Geithner, US debt
Posted in Secondary Market/Investors, Top Stories | 5 Comments »
The Florida Housing Finance Corp. is finally ready to put $1 billion in Treasury Department funds to use by funding solutions for distressed homeowners across the state.
On Monday, the agency began accepting applications for the Florida Hardest-Hit Fund, a program that offers qualifying borrowers two options for saving delinquent mortgages. The Treasury Department disbursed funds from its $7.6 billion Hardest-Hit Fund last summer, but the roll-out is just now taking place.
Wells Fargo (WFC: 29.38 -1.71%) is also in talks with the Arizona Department of Housing to join a program providing principal reduction on delinquent mortgages using some of the $268 million allocated to the southwest state through HHF, a source familiar with the negotiations said earlier this month. Bank of America is also doing the same in the state.
Plan one under Florida's program offers unemployment mortgage assistance that runs up to six months or $12,000 in total payments, whichever threshold is reached first. In addition, the mortgage loan reinstatement program was deployed to bring delinquent mortgages up to date, with the cap at $6,000.
Florida Housing Finance Corp. launched a pilot program in Florida's foreclosure-ridden Lee County in March. Homeowners across the state can now submit applications.
The program is the result of a 2010 Treasury initiative in which the federal agency created the Housing Finance Agency Innovation Fund for the hardest-hit housing markets. The Treasury agreed to allocate millions of dollars to states riddled with distressed loans and suffering from high housing depreciation rates. The states include Florida, California, Arizona, Michigan and Nevada.
Write to Kerri Panchuk.
Tags: Federal Housing Finance Agency, Florida Housing Finance Corp., Treasury
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The Federal Reserve is requesting comment on a plan that outlines how the central bank will assume its new responsibility of overseeing savings and loan holding companies.
Savings and loan institutions, or thrifts, were the root cause of the late 80s-early 90s recession after about half of the nation's savings and loan associations failed due to their ties to fledgling real estate prices and a general slowdown in the financial services industry.
The Dodd-Frank Wall Street Reform and Consumer Protection Act stipulates that the Fed will take over supervisory and rule-writing authority for S&Ls and their non-depository subsidiaries. Currently, the Office of Thrift Supervision is charged with overseeing the segment, but that responsibility shifts to the Fed July 21.
In its proposed plan, the Fed says it expects the consolidated capital requirements of S&Ls to be addressed in the Basel 3 rulemaking process. The Fed indicated it would assess S&L capital levels using methods similar to the OTS until consolidated capital standards are laid out for that segment.
The notice on how the Fed plans to assume its supervisory authority will be published in the Federal Register by the end of May.
The OTS has been the subject of criticism in federal studies outlining some of the oversight problems that contributed to the 2008 financial crisis. Discussions about the end of the OTS have been underway for months, with the department expected to be fully absorbed into the Office of the Comptroller of Currency.
Write to Kerri Panchuk.
Tags: Dodd-Frank Act, Federal Reserve Board, Office of Thrift Supervision, savings and loan
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