Refinance Free Credit

Responding to a scathing editorial last week by New York Governor Eliot Spitzer that claimed the Office of the Comptroller of the Currency hamstrung state-led efforts at mortgage industry reform in the early 1990s, the OCC’s John Dugan had harsh words of his own for the former state attorney general.

“Almost everyone who has paid attention to the subprime lending crisis has concluded that OCC-regulated national banks were not the problem,” Dugan said. “Instead, the worst abuses came from loans originated by state-licensed mortgage brokers and lenders that are exclusively the responsibility of state regulators.”

Saying that Spitzer’s inflammatory comments were “just plain wrong,” Dugan said his office has protected the national banking system from predatory abuses. “Predatory mortgage lenders have avoided national banks like the plague,” he said.

Dugan said that, contrary to Spitzer’s assertions otherwise, the OCC’s efforts to ensure federal regulation of the national banking system did not prevent the former NY AG or other state AGs from pursuing state-level regulation.

“It defies logic to argue that preemption was an impediment,” Dugan argued. “The states should have applied equally rigorous standards to the non-bank lenders.”

As the estimated financial cost of the current mortgage crisis surpasses the damage of the savings & loan crisis of the late 1980s, a new study released late last week found that the number of subprime-related cases filed in federal courts is also outpacing the savings-and-loan (S&L) litigation of the early 1990s.

The number of subprime-related cases filed in 2007 already equals half of the total 559 S&L cases handled by the Resolution Trust Corporation (RTC) over a multiple-year period, according to financial advisory firm Navigant Consulting, Inc. The subprime numbers represent only federal court filings — so the actual number of cases may be higher.

“The S&L crisis has been a high water mark in terms of the litigation fallout of a major financial crisis. The subprime-related cases appear on their way to eclipsing that benchmark,” said Jeff Nielsen, managing director of Navigant Consulting.

The number of subprime-related cases filed doubled during the second half of 2007, from 97 to 181 (for a total number of 278) cases. These cases included borrower class actions (43 percent), securities cases (22 percent), and commercial contract disputes (22 percent), along with bankruptcy, employment, and other cases.

“This appears to be just the beginning,” said Nielsen. “We are already observing a steady acceleration of continuing litigation activity into 2008. The course of regulatory investigations, the prospect of government intervention and marketplace variables may affect the volume of filings, but the explosion of cases in 2007 suggests a daunting forecast of what is still to come.”

The study found that virtually every participant in the subprime collapse is being sued.

Fortune 1000 companies were named in 56 percent of cases. Mortgage Bankers and Loan Correspondents represent the highest percentage of defendants (32 percent) but defendants also include mortgage brokers, lenders, appraisers, title companies, homebuilders, servicers, issuers, underwriting firms, bond insurers, money managers, public accounting firms and company directors and officers, among others.

First Mariner Bank filed a $15 million lawsuit against Virginia-based mortgage broker East West Mortgage Co., claiming the firm committed fraud on loans it sent to the bank for funding and sale. Citing a Jan. 25 lawsuit, the Baltimore Business Journal reports:

… First Mariner claims that to get the loans financed, East West created false credit references for borrowers, faked documents related to borrowers’ employment and income and obtained home appraisals for more than the properties were worth. On one $310,000 loan made in June 2006, East West allegedly gave First Mariner two faked credit references and a false document verifying the income in the borrower’s account, the lawsuit says.

First Mariner posted a $10 million loss for 2007. First Mariner made mortgage loans and sold them to investors during the housing boom, but has had to buy back millions of dollars’ worth of the loans after the borrowers defaulted.

According to the suit, a majority of East West-originated loans were subject to early-payment default activity, with borrowers claiming “no idea” that documents had been forged in the origination process.

First Mariner is a Baltimore-based bank with $1.3 billion in assets. A review of East West’s Web site did not provide information on the size of the broker’s operation.

Ambac Financial Group Inc. is considering a split of its municipal and mortgage-related bond insurance businesses, the Wall Street Journal reported on Monday. The news makes Ambac the latest monoline — along with FGIC Corp. — to consider a break up of its business as the mortgage crisis has stripped the insurer of most of its previously-held AAA ratings.

The monolines provided the top-rated portions of MBS deals with a guarantee that essentially is designed to serve as a private-party proxy for the government guarantee that exists on Fannie/Freddie/Ginnie bond issues. But the strength of that guarantee is only as good as the rating of the firm that provides it, which means that downgrades to bond insurers are wreaking havoc on the already unsteady mortgage-backed bond market, as investment-grade securities are seeing their top ratings vanish.

From the WSJ’s coverage of Ambac:

A halving of Ambac would create one unit that insures municipal debt and one that would cover rapidly diminishing securities tied to the mortgages in a structure that effectively creates a so-called “good bank” and “bad bank.”

… But the plan to split Ambac is complex and has required tens of hours in recent days. While a “good bank-bad bank” model has existed for decades, there isn’t a playbook for halving a bond insurer. A number of issues remain to be resolved, said a person familiar with the situation.

New York Insurance Superintendent Eric Dinallo had suggested a break-up of some monolines last week.

“We cannot allow the millions of individual Americans who invested in what was a low-risk investment [municipal bonds] lose money because of subprime excesses,” he said. “Nor should subprime problems cause taxpayers to unnecessarily pay more to borrow for essential capital projects.”

The subprime mortgage market mess kicked off in the U.S. has claimed UK-based bank Northern Rock, which was nationalized over the weekend amid much shareholder angst. Northern Rock first ran aground last September, when it became subject to the sort of mini-bank runs that had plagued Countrywide Financial here in the States late last year.

From the FT:

Alistair Darling on Sunday announced the first nationalisation of a sizeable British bank in a quarter of a century as he put Northern Rock into public ownership, infuriating shareholders and shocking the two private bidders hoping to take over the stricken mortgage lender.

Visibly concerned to avoid queues forming outside branches on Monday, the chancellor and Ron Sandler, Northern Rock’s new executive chairman, insisted it would be “business as usual”.

In a formal statement published at MarketWatch, Darling, the British Chancellor of the Exchequer, said that “we do not believe that they [two private-party bids for the bank] deliver sufficient value for money for the taxpayer.”

Conde Nast’s Felix Salmon suggests that nationalization may be good or bad, depending on your lens:

There would be angry shareholders and laid-off workers whatever the outcome, but maybe it’s worse if the new owner is the government. On the other hand, maybe it’s better: since taxpayers were ultimately taking on the Rock’s risk anyway, it’s good that it’s also going to receive the Rock’s returns.

If you haven’t seen this yet then you probably don’t work on Wall Street or in a large mortgage shop where it’s been forwarded a dozen-hundred times.  We’ve had songs, top 10 lists, videos, and now add to it the Subprime Primer slide show.  Full of F-bombs (you’ve been warned) it takes us through an origination of a subprime no-doc mortgage all the way through to the Norwegian village that is now losing money on its investment.

It’s pretty funny, and worth watching if it’s a slow holiday Monday for you.  It may not be safe for work due to the language used.  — Morgan

Hat tips to two different Blown Mortgage readers and the Inman blog guys for pointing the way.

Home prices fell across a wide swath of U.S. ZIP codes during the fourth quarter of 2007, according to a new report, suggesting that the nation’s housing troubles have extended well beyond so-called ‘bubble’ areas and are reaching into areas some thought might have been insulated from the mortgage and housing debacle.

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According to data released late last week by First American CoreLogic, housing prices fell in more than 75 percent of the nation’s primary ZIP codes over the last three months. The graphic to the right shows the three-month price performance by state.

“Of the 7,472 ZIP codes tracked by the LoanPerformance HPI, home prices in 5,691 (76.16 percent) of these ZIP codes have decreased over the last three months,” said Damien Weldon, vice president, collateral and prepayment analytics for First American CoreLogic.

“Year-over-year, however, just 4,028 (53.91 percent) of the ZIP codes we track indicate decreasing property values,” added Weldon.

The widespread drop during the fourth quarter is an area of concern for U.S. policymakers and industry participants; while yearly price gains are intact in many areas, continued widespread drops will eventually wipe out any gains in annual terms.

“This clearly suggests we have some way to go before this correction plays out,” said one manager at a national bank, who asked not to be named. “Anyone focusing on the annualized results without looking at quarterly trending is missing the larger picture.”

California was hit particularly hard, with 97.67 percent of the ZIP codes tracked in the state posting an annualized decline.

For more information, visit http://www.loanperformance.com.

Underscoring just how reliant the industry has become on third parties to manage the loss mitigation process, Computer Sciences Corp. said late last week that it has teamed with HOPE NOW Alliance members to extend its EarlyResolution loss mitigation platform to third-party credit counseling agencies.

Called the EarlyResolution Counseling Portal, CSC said it delivered the new platform to Wells Fargo, Bank of America, Countrywide and the Consumer Credit Counseling Service of Greater Atlanta Inc. in January for pilot testing. The full ERCP service will be available widely by the end of this month, CSC said.

EarlyResolution is a loss mitigation tool that CSC says is used by five of the top 10 mortgage servicers; the new counseling portal provides a common platform for mortgage servicers and nonprofit consumer counselors to work together. With ERCP, mortgage servicers can make loan data accessible to participating credit counselors, while counselors can complete debt evaluations more quickly in order to return workout recommendations to the servicer.

“This is a unique cohesive effort between nonprofit counseling groups and mortgage servicers who are aligned to preserve home ownership,” said Ed Delgado, Wells Fargo Home Mortgage senior vice president and HOPE NOW Alliance Technology Committee chair.

“With CSC’s help, HOPE NOW is providing a scalable, national solution to help stabilize the housing market.”

CSC and participating pilot institutions say that counselors will be able to handle a higher volume of inquiries and reduce training time and costs. ERCP’s technology will also streamline loss mitigation referrals to servicers, they say, by recommending workout options for delinquent borrowers that are consistent with servicer guidelines and in compliance with investor rules.

“CSC’s work with the HOPE NOW Alliance advances our objective of putting the right tools in place across all potential borrower contact channels — servicers, counseling agencies and borrowers,” said Kevin Schlumpf, managing director of the EarlyResolution practice at CSC.

ServiceLink, a closing management specialist and subsidiary of Fidelity National Title Group, said Monday that it will offer warranted collateral valuations and automated valuation model (AVM) reports in an effort to ensure lender confidence in the property valuations it offers.

By warranting the property values it provides, the company is attempting to reduce the buy-back risk between originators and investors due to inaccurate valuations, insulating the lender from a financial loss resulting from default, foreclosure or rejection by the secondary market.

“The mortgage industry needs a higher level of confidence that valuations are accurate and reliable,” said Kevin Gugenheim, executive vice president and chief strategic officer of ServiceLink.

“With this added protection to the lender, transferee or assignee against an actual financial loss, ServiceLink’s offering of the warranted collateral valuations and AVM reports are intended to not only offer greater protection, but to boost investor confidence levels and secure loan approvals more quickly.”

It isn’t clear if the warranty is backed solely by ServiceLink, or if the warranty extends to the resources of its corporate parent — which is one of the largest title insurance providers in the country. The company did not comment further on the nature of its warranty offering, and whether it intends to assume all buyback risk for improper valuations.

For more information, visit http://www.servicelinkfnf.com.

Downey Financial Corp. reported last week that non-performing assets at the option ARM specialist have continued to climb quickly, in spite of the lender’s efforts to restructure ‘at-risk’ borrowers ahead of possible delinquency and/or default.

Total NPAs reached 9.14 percent, a rise of 137 basis points in just one quarter; non-performing assets are now roughly twelve times greater that the 0.78 percent recorded one year earlier.

Rising borrower defaults led Downey to report a fourth quarter loss of nearly $109 million, although the lender has been moving aggressively to restructure its outstanding payment-option mortgages into more traditional mortgages. Downey’s auditors, KPMG, in January forced the lender to report its efforts as troubled debt restructurings — a move that bumped up overall non-performing assets.

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Troubled debt restructurings notwithstanding, severe delinquencies continue to rise as well, suggesting that many borrowers are significantly underwater on their existing payment-option mortgages and unable to successfully restructure. The chart to the right shows both the percentage of troubled debt restructuring and more traditional NPAs — both of which are increasing briskly.

For more information, visit http://www.downeysavings.com.

Disclosure: The author held no positions in DSL at the time this story was published.