Archive for September, 2011
Credit ratings agency DBRS expects the rate of foreclosures to continue to rise for the remainder of 2011, but investors in the residential mortgage-backed securities that rely on these properties for collateral will have some time before losses kick in.
DBRS expects that real losses to the bond investors will more likely come in 2013.
"This is due to the length of time that it is currently taking to complete the foreclosure process, particularly in judicial states, which is averaging 24 months because the county clerks are battling their own backlogs due to budget cuts and mandatory furloughs," said DBRS analyst Kathleen Tillwitz in an email alert.
During the housing boom, where new mortgages were financed in the private sector, securitizations were created left and right to provide the necessary capital.
Many of those deals are not likely overcollateralized, meaning that when a home drops out of the bonded pool, there is no other collateral to replace the lost income stream. Other loss-mitigation tools, such as mortgage modifications, are not proving to be greatly effective at staving off foreclosure, at least for properties in these particular RMBS pools.
Five states accounted for 53% of the nation’s total foreclosure activity in August: California, Florida, Michigan, Illinois and Georgia. And it's growing. California default notices alone spiked 55% in August, and the number may keep rising in the coming months as mortgage servicers shake off the robo-signing freeze, according to RealtyTrac Senior Vice President Rick Sharga. Other states with foreclosure rates ranking among the top 10 were Arizona, Texas, Ohio, Nevada and Colorado. (Click chart to expand.)
"This was even with the majority of servicers using multiple modifications as their primary loss mitigation tool," Tillwitz said.
Write to Jacob Gaffney.
Follow him on Twitter: @JacobGaffney
The Obama administration fired several salvos at economic reform Monday, including details on changes to housing finance.
One such consequence, should the proposed changes take, would be to expand the universe of private mortgage insurance for Fannie Mae or Freddie Mac loans.
The government-sponsored enterprises often require private mortgage insurance on mortgages with loan-to-value ratios above 80%. The coverage is often deeper than is even required by law and there are hints it could go to a lower LTV.
Federal Housing Finance Agency Acting Director Edward DeMarco detailed in a speech at the American Mortgage Conference in North Carolina Monday a variety of ways the conservatorship of the GSEs would be changing. Among them is a new way to reduce their long-term risk exposure. Meaning, DeMarco is looking to share Fannie and Freddie's risk with the private market via mortgage insurance in some of those ways.
His first example was requiring private mortgage insurance on more loans guaranteed by the GSEs.
"A traditional way that the Enterprises shared risk with the private sector was through the use of private mortgage insurance," DeMarco said. "Consideration could be given to requiring greater mortgage insurance coverage, but doing so would need to be weighed against the financial condition of individual mortgage insurers."
If the FHFA adopted such a policy, it would clash against the current risk-retention proposal. According to a still pending rule proposed by federal regulators, lenders would not have to maintain the credit risk on a mortgage after securitization if the borrower puts 20% down and if other requirements are met as part of the qualified residential mortgage exemption. But no room was made for mortgage insurance under the QRM.
The long suffering private mortgage insurance sector would likely appreciate the opportunity to write new business.
The PMI Group (PMI: 0.00 N/A) is in a tailspin after its regulator the Arizona Department of Insurance forbid it from writing new policies.
The GSEs suspended the use of Republic Mortgage Insurance. Worsening claim costs pushed Old Republic (ORI: 9.74 +1.88%) losses wider in the second quarter.
Meanwhile, Genworth Financial (GW: 0.00 N/A) scrambled to cover losses using cash from its Canadian subsidiary, and Mortgage Guaranty Insurance Corp., under MGIC Investment Corp. (MTG: 3.79 -2.07%), is gaining market share off the faltering of others.
An industry trade group, the Mortgage Insurance Companies of America, said DeMarco's comments were welcome news.
"MICA welcomes the opportunity to play a vital role in housing finance for a return to prudently underwritten low down payment mortgage loans to meet the needs of moderate to low income families and first time homebuyers," the trade group said in a statement sent to HousingWire. "Private mortgage insurers provide deeper coverage to the protect the U.S. taxpayer."
DeMarco's speech revolved around sharing the public risk of Fannie and Freddie with the private sector. He also said FHFA would raise the g-fees on securities in 2012.
He said the past degree of cross subsidization of certain product types will not be present in a private-dominant model. The FHFA will also take into account local economic conditions and state laws, specifically foreclosure timelines, when pricing the g-fees. Meaning, in places where it is more expensive and longer to foreclose, lenders could see g-fees go up. DeMarco also added that the fee competition between the GSEs would not be appropriate in the future, signaling an alignment of the fees between the two giants.
Fannie and Freddie may also sell off credit risk on the securities it guarantees to the private market. DeMarco said there are several securities structures that will be considered in the coming months.
"If the market price to absorb a portion of the Enterprises’ risk exposure is greater than the charged guarantee fee, that would be a signal of how much prices would have to rise to attract private capital and move the Enterprises’ guarantee fee pricing more in line with private markets," DeMarco said.
Write to Jon Prior.
Follow him on Twitter @JonAPrior.
