Archive for August, 2011
Countrywide, now part of Bank of America (BAC: 7.23 -0.96%), could face billions in additional losses if a New York court sides with bond insurer MBIA. Further, such a ruling could lead to bond issuers facing billions of dollars more in loses to bond insurers.
MBIA contends that Countrywide violated representations and warranties when the subprime lender offered inaccurate information on the mortgages it originated.
Analysts at Branch Hill Capital believe a court ruling in MBIA's favor could expose BofA to nearly $10 billion in additional losses tied back to reps and warranties made in contracts between banks and monoline insurers.
The Association of Financial Guaranty Insurers went a step further: "We estimate that these BofA repurchase obligations aggregate in the range of $10 billion to $20 billion for our industry members alone"
AFGI made that estimation not long after the banking giant sounded an alarm in a quarterly filing about reps and warranties litigation. In the filing, BofA discusses the potential financial exposure it faces as insurers push back against financial institutions when it comes to claims made in insurance contracts.
MBIA is suing BofA and Countrywide to force the lender to buyback loans it insured for the big bank.
On the other hand, Bank of America believes the causation standard should be higher. The bank said in a quarterly filing that "the repurchase claimants must prove that the alleged representations and warranties breach was the (actual) cause of the loss."
The issue was scheduled to be heard in court this week, but has been rescheduled for early October.
Write to: Kerri Panchuk.
Tags: Association of Financial Guaranty Insurers, Bank of America, Branch Hill Capital, Countrywide, MBIA, MBS, mortgage-backed securities, representatiosn and warranties, reps and warrants
Posted in Secondary Market/Investors, Top Stories | 1 Comment »
A panel of financial advisers and attorneys said the ongoing litigation between banks and their investors in soured mortgage-backed securities sold during the housing boom will not be resolved any time soon.
The panel, conducted in collaboration with Bloomberg Television, consisted of various regulatory and dispute consultants at Deloitte and Howard Altarescu, a partner with Orrick, Herrington & Sutcliffe. They discussed lingering problems holding back a housing recovery and debated where the industry will go next.
One of the largest hurdles are the representation and warranty claims both private investors and the government-sponsored enterprises are lobbing toward financial institutions.
"This will go on for years," Altarescu said. "There will be more litigation if the government, banks, and private investor groups continue to bring additional suits; there will be a statute of limitations at some point…but the suits that have been brought, which are hundreds of billions of dollars, could go on for many years."
The most pressure appears to land on Bank of America (BAC: 7.23 -0.96%) because of the Countrywide Financial Corp. mortgage portfolio acquired in 2008.
In the first quarter, BofA paid out roughly $3 billion to settle representation and warranty claims from Fannie Mae and Freddie Mac. It also settled with the monoline insurer Assured Guaranty (AGO: 15.55 +2.30%) for $1.6 billion.
In the middle of July, rumors circulated of a settlement between BofA and the bond insurer MBIA (MBI: 12.06 +0.50%).
At the end of July, BofA settled with a group of investors led by Bank of New York Mellon (BK: 20.10 +0.50%) for $8.5 billion over soured MBS. Other investors in the deal and the New York Attorney General challenged the settlement, however.
But the representation and warranty claims are also climbing for other large banks. For instance, GSE claims surpassed $1 billion at Ally Financial (GJM: 22.43 -0.62%) during the second quarter.
J.H. Caldwell, a partner at the regulatory and capital markets consulting division within Deloitte, said it is easier to pin down how much exposure the banks have to the GSEs than to private investors, making it difficult to determine how long the troubles will last.
"While most of the mortgage institutions have disclosed the estimates for their financial exposure to the GSE claims, not many have disclosed what their estimates for exposure against the private-label litigation might be," Caldwell said.
Dennis Kiefer, director of forensic and dispute services at Deloitte, agreed and pointed out it is difficult for private investors to make a claim based on fraud. The courts have yet to decide what the standard for such showing will be. Until that happens, progress for sorting out legacy mortgage issues will remain stalled.
"There are a couple of things going on here. First, there's not a lot of history yet; nobody really knows how successful these claims are going to be," Kiefer said. "I think the story is yet to be told."
Write to Jon Prior.
Follow him on Twitter @JonAPrior
Tags: advisors, banks, buyback, Deloitte, foreclosure, fraud, litigation, MBS, mortgage, panel, representation and warranty
Posted in Secondary Market/Investors, Top Stories | No Comments »
The U.S. Court of Appeals for the 8th District rejected a petition by Fair Issac Corp. (FICO: 36.00 -8.23%) to hear the company's claim VantageScore Solutions and the three leading credit reporting firms infringed FICO's trademark scoring scale.
The court affirmed all earlier rulings, which said FICO didn't hold trademark rights to its range of 300 to 850 for individual credit scores.
The battle raged for about five years. FICO first filed suit in October 2006 after VantageScore — backed by Equifax (EFX: 39.31 +0.13%), Experian and TransUnion — launched its credit scoring system. FICO alleged the companies engaged in antitrust, unfair and anticompetitive practices, harming the FICO brand.
"I'm extremely gratified to put this lawsuit behind us and I look forward to an open market free from the encumbrance of litigation," VantageScore CEO Barrett Burns said.
FICO said the decision has little impact on its business and FICO scores "remain the most trusted and most used measure of consumer credit risk among lenders."
"Although our efforts thus far have not resulted in a favorable legal settlement, they have helped to advance the important national issue of transparency and fairness when consumers obtain their credit scores," the company said.
"At a time when consumers most need clarity regarding their creditworthiness, it's imperative that they understand whether the credit scores they purchase are FICO scores, which are used by most lenders to make lending decisions, or merely lookalike scores not actually used by lenders to make lending decisions," according to FICO.
Kerry Williams, group president at Experian Credit Services and Decision Analytics, said the "decision once again confirms the value of competition and choice in credit scoring."
Despite the contentious battle over the scoring model, the companies continue to unveil new products and extend their brands.
In January, VantageScore launched the second generation of its credit valuation system, that leverages the core platform to deliver improved predictive performance and allow lenders to look beyond the economic volatility of recent years and reenter the market with confidence, according to Burns.
In April, FICO announced new technology designed to help lenders identify the probability of strategic default by looking at a borrower's credit score.
Write to Jason Philyaw.
Follow him on Twitter: @jrphilyaw
Tags: anticompetitive, antitrust, credit scores, Equifax, experian, Fair Issac Corp, FICO, transunion, U.S. Court of Appeals for the 8th District, VantageScore Solutions
Posted in Origination/Lending, Secondary Market/Investors, Top Stories | No Comments »
Commercial real estate is bottoming out, giving investors a chance to nab properties from over-leveraged owners, according to analysts at the real estate investment subsidiary of The Bank of New York Mellon.
In this environment, commercial real estate becomes ripe investment territory for eager players, the analysts said.
"Having reached what we believe to be the bottom of a historic slide, today's real estate investment market resembles the stock market of March 2009, with broad price indices down by roughly half or more from their peaks without accounting for differences in underlying leverage," the analysts said.
Investors can make money on the buy side as property owners reach a precipice where they either have to invest more equity into their properties or sell it, according to the analysts.
"The reset basis at which such properties may be acquired enables the new ownership to offer lower rental rates and better improvement-concession packages than comparable properties with greater debt burdens — a significant competitive advantage in periods of weak demand," they said.
Investors who choose this path will be entering the market a year after commercial real estate started its "tentative," but uneven recovery.
"For the year as a whole, transaction volume of approximately $94 billion represented an increase of 68% over the 2009 total," the firm said.
Write to: Kerri Panchuk.
Tags: commercial real estate, investors, stock market, The Bank of New York Mellon Corp.
Posted in Secondary Market/Investors, Top Stories | No Comments »
Mortgage servicers contending with attorney general investigations and extended foreclosure delays turned more to short sales in the past year.
In August 2009, short sales accounted for 8% of all liquidations of distressed properties. That number grew to 25% by the middle of 2011, according to research from Moody's Investors Service.
Meanwhile, the time it took from a borrower default to eventual REO liquidation grew from an average 14 months in early 2009 to 24 months by the summer of 2011.
The delays pushed the timelines out and as a result, losses on the eventual sale of those properties higher. Servicers had to halt the foreclosure process in October 2010 to correct forged documents and mishandled foreclosures as part of the robo-signing scandal. Since then, new regulations from federal agencies and still ongoing negotiations between the state AGs left servicers turning toward an early sale of the property before a filing a foreclosure.
"To reduce their expenses and mitigate the high loss severity on liquidated loans, servicers are increasingly opting to bypass the foreclosure process and liquidate properties more quickly through a short sale," Moody's analysts said.
Researchers at Deutsche Bank said servicers are using the transactions to also cut into the shadow inventory of properties stuck somewhere in the foreclosure process. Standard & Poor's said the market actually cut into the shadow inventory during the second quarter for the first time since 2009.
Deutsche Bank found short sales actually take less time to complete than REO sales because of the documentation problems.
The average REO took 17 months to sell in the middle of 2011, compared to just under 12 months for short sales completed in that time, according to Deutsche Bank.
Loss severities dropped as well. Servicers experienced a 70% loss rate on REOs sold in the middle of 2011, compared to less than 60% for short sales.
These transactions also do less damage to a borrower's credit score, dropping it between 50 and 200 points compared to an REO sale, which can slash the FICO score for the borrower as much as 400 points.
Borrowers who manage a short sale can buy a new home between one and two years as well, according to researchers. Those whose homes sell through REO must wait between five and seven.
However, short sales continue to be a struggle as investors often squabble over whether or not to approve the transaction.
"Short sales, like other servicer loss mitigation strategies, may stir a fierce 'class warfare' between investors in different parts of the deal capital structure," Deutsche Bank researchers said.
Moody's analysts said short sales steadied loss severities over the past year, as foreclosure problems continue to plague the recovery.
"We can attribute the stabilization of average loss severities in part to a rising number of liquidations through short sale, which by reducing liquidation timelines, foreclosure expenses, and legal costs, can reduce the losses incurred on defaulted loans," Moody's said.
Write to Jon Prior.
Follow him on Twitter @JonAPrior
Tags: AG, delinquent, foreclosure delays, investigation, Moody's Investors Service, mortgage, REO, S&P, serviciers, shadow inventory, short sale
Posted in Servicing/Default, Slider, Top Stories | 6 Comments »
The workforce in New Jersey is one of the nation's most educated, but residents remain entangled in a web of financial troubles with the state's delinquent mortgage rate sitting at 10% percent.
Federal Reserve Bank of New York president William Dudley made that assessment while speaking to a New Jersey crowd Thursday. By Fed estimates, the unemployment rate in Jersey stands at 9.5%, while the number of mortgages 90 days or more past due or in foreclosure hit 10% back in March.
During the Great Recession, the state lost 250,000 jobs. The population of New Jersey is 8.8 million and 40% of its citizens are college graduates.
Dudley calls the jobs recovery in New Jersey "sluggish," with the private sector experiencing only "moderate gains." When you add state budget cuts and a reduction in state government jobs, the employment situation continues to look grim.
"Because the jobs recovery has been weak, there has been little progress in reducing unemployment," Dudley said.
The median household income in New Jersey sits at about $68,000, with 9% of the state's residents living below the federal poverty line.
While home prices have firmed in the past few months, borrowers are still carrying substantial debt levels. The average debt per person in New Jersey stands at $60,400, the Fed said.
Dudley said without job growth, the state's housing and debt situation is unlikely to experience significant improvement.
"These debt and delinquency figures, together with the weak jobs picture, suggest that New Jersey faces a number of challenges," Dudley said. "In the near term, the key issue will be to expand jobs and reduce unemployment."
Write to: Kerri Panchuk.
Tags: delinquency rate, Federal Reserve Bank of New York, mortgage, mortgage rate, unemployment
Posted in Origination/Lending, Top Stories | 1 Comment »
Fewer lenders said credit availability shrank for low- and moderate-income families in the second quarter, according to a survey conducted by the Federal Reserve Bank of Philadelphia.
However, fewer lenders see a better future financial well-being for these families. In the second quarter, 4% expect well-being to increase, down from 16% in the first quarter.
More lenders, 16%, did say affordable housing became available, compared to the 8% in the first quarter. Only 17% saw an increase in the availability of jobs, and 59% expected no change in job growth in the near future.
"Survey respondents noted financial factors facing (low- to moderate-income) households declined at a similar rate as in our previous survey," said research analyst Brian Tyson. "Demand for services increased, while service providers continue to face challenges maintaining their funding and capacity to serve their clients' needs."
The Philly Fed surveyed 80 financial service providers to lower-income households. Of those who responded, 34% reported credit availability decreased, compared to 59% in the first quarter survey.
And 10% of those surveyed expect the access to credit to grow, up from 9% the previous quarter.
This is important because demand is growing. In the second quarter, 79% of respondents said the demand for their services increased, up from 76% in the first three months of the year.
Write to Jon Prior.
Follow him on Twitter @JonAPrior
Tags: credit, Federal Reserve Bank of Philadelphia, financial, jobs, lenders, Philly Fed, well-being
Posted in Origination/Lending, Top Stories | No Comments »
The 30-year, fixed-rate mortgage hit lows not seen in five decades this week as the Federal Reserve committed to keeping the federal funds rate low through 2013, according to the Freddie Mac Primary Mortgage Market Survey.
European debt concerns also riled the market, staving off a hike in mortgage rates, according to Frank Nothaft, vice president and chief economist for Freddie Mac.
The 30-year, fixed-rate mortgage dropped to 4.15% from 4.32% a week earlier and 4.42% last year. Nothaft said 30-year, fixed mortgage rates are at their lowest levels in five decades.
Meanwhile, the 15-year, FRM hit 3.36%, down from 3.50% a week earlier and 3.90% last year. In addition, the 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 3.08% this week, down from 3.13% a week earlier and 3.56% a year ago, while the one-year Treasury-indexed ARM averaged 2.86%, down from 2.89% last week and 3.53% last year.
The low rates kept refinancing activity high. In the first half of 2011, refinancing applications represented nearly 70% of all mortgage activity.
Bankrate attributes the record low interest rates to "weakness in the U.S. economy and the accompanying demand for Treasury securities."
According to Bankrate's survey, the 30-year, FRM hit 4.45%, down from 4.46% last week, while the 15-year, FRM hit 3.58%, down from 3.61% a week earlier.
The 5/1 ARM fell to 3.15% from 3.24% a week earlier.
Write to: Kerri Panchuk.
Tags: 15-year, 30-year, Bankrate, fixed-rate mortgage, freddie mac, Freddie Mac Primary Mortgage Market Survey, FRM
Posted in Origination/Lending, Top Stories | 3 Comments »
Sales of existing homes in July fell 3.5% from the prior month, as tightened lending standards continue to hurt potential homeowners, according to the National Association of Realtors.
The huge trade group said sales of single-family homes, townhomes, condos and co-ops decreased to a seasonally adjusted rate of 4.67 million last month from 4.84 million in June.
NAR said July existing home sales were 21% higher than 3.86 million a year ago, which was the cyclical low immediately following the expiration of the homebuyer tax credit.
"Affordability conditions this year have been the most favorable on record dating back to 1970, but many buyers are being held back because banks are offering financing to only the most highly qualified borrowers, ignoring a large share of otherwise creditworthy buyers," according to NAR Chief Economist Lawrence Yun.
"Those potential buyers represent the difference between an uneven recovery and a much more robust housing market that could stimulate additional economic activity and create jobs," Yun said.
NAR said 16% of its members reported contract failures in July, while 9% said a contract was delayed in the past three months due to low appraisals, and 13% renegotiated a deal to a lower price following a appraisal less than the initially agreed price.
Paul Dales, senior U.S. economist at Capital Economics, said July's decline indicates the housing market will not save the economy.
"In fact, with home sales now 13.5% below January's level is it becoming clear that the economic slowdown and drop in confidence is hitting housing demand," Dales said. "Indeed, part of the fall was due to an unusually high share of previously signed contracts being cancelled."
Ron Phipps, president of NAR and an eponymous realty firm in Warwick, R.I., said the loose underwriting standards of the housing boom have been replaced with "unnecessarily restrictive" lending.
"Beyond the tight credit problems, all appraisals must be done by valuators with local expertise and using reasonable comparisons — it doesn’t make sense to consistently see so many valuations coming in below negotiated prices, often below replacement construction costs," according to Phipps.
"To a great extent, banks are exerting influence on appraised valuations with negative impacts for both home sales and prices,” Phipps said.
The inventory of existing homes for sale fell 1.7% in July to 3.65 million, representing a 9.4-month supply, according to NAR. That is up from 9.2 months worth of supply in June.
The median price on existing home sales fell to $174,000 in July, down 4.4% from a year earlier, according to NAR. Sales of distressed properties accounted for 29% of all sales in July, down from 30% in June and 32% a year ago.
Write to Jason Philyaw.
Follow him on Twitter: @jrphilyaw
Tags: Capital Economics, Exisiting home sales, homebuyer tax credit, NAR, National Association of Realtors, single-family homes
Posted in Origination/Lending, Top Stories | 3 Comments »
Low interest rates and a glut of inventory failed to substantially stimulate a weak housing market this summer, according to Altos Research.
Based on summer statistics and shaky economic indicators, Altos is predicting a "long, cold winter" with nothing on the horizon to suggest improved housing market activity through the fall and winter.
Home prices in July rose in 14 of the 20 metro areas surveyed for the Altos Research Mid-Cities Report and inventory increased in 12 of the markets.
"This is the first time we have experienced the current combination of low interest rates, high unemployment, and a glut of inventory hiding in the shadow," Altos said. "The housing market in the United States is in a constant state of flux. Volatility is the norm and the rules of yesterday's market no longer apply."
The U.S. median home price rose a mere $7 in July to $256,120 from $256,113 in June, with large increases in San Antonio, Boise, Idaho, and Boulder, Colo. The biggest gain was in Boulder where home prices rose 8.23% last month, Altos said.
Eight of the 20 markets saw their housing inventory levels decline, while six of 20 markets noted a drop in median prices.
The Federal Reserve Bank of Dallas recently said it expects home prices to bottom out by early 2012, with market volatility somewhat limited to certain hard-hit areas, such as Arizona, California and Nevada. The Fed said markets like Texas, where jobs have been created during the recession, could see the tide shift by the early part of 2012.
Write to: Kerri Panchuk.
Tags: Altos Research, Altos Research Mid-Cities Report, housing inventory, housing market, median home prices
Posted in Origination/Lending, Top Stories | 1 Comment »
