Refinance Free Credit

If you work in default management, it’s time to cozy up to the idea that you may be answering to new boss sooner rather than later — as we’ve reported in the past, hedge funds are lining up on both sides of the mortgage market to snap up distressed mortgages or the securities backed by them.

The latest is ARE Asset Management, a Miami-based real estate company that has launched the ARE Fixed-Income Fund and the ARE Opportunity Fund with $100 million each, according to a story published Friday by hedge fund trade publication FINalternatives.

The Opportunity Fund will purchase non-performing residential mortgages at a discount and manage those loans to recovery or foreclosure, the publication reported. And they’re certainly not alone, not in a universe where such heavy hitters as BlackRock and Highland Capital have already committed $2 billion to buying up distressed mortgages in bulk as well.

From the story, a look at why the firm’s managing principal thinks smaller may end up being better on the whole loan side:

“We see the bottom coming and we think it’s appropriate to get into this market before we do hit bottom,” Jeffrey Kirsch, managing principal, said. “We have turned bullish and don’t want to wait any longer for the opportunity. We can be very selective right down to the zip code where we buy, and we believe the government is doing everything in their power to turn the mortgage industry around.”

Kirsch said the firm, which has bought and sold more than $1 billion in first-mortgage residential loans during the last several years, has a distinct advantage over its hedge fund peers in that it owns its own loan processing unit.

“While hedge funds may have a lot of money and the ambition to enter this market through whole loans, I often question their ability to have these loans serviced,” he said. “It’s difficult to be in this business today without having a servicer, and most of the large servicers are owned by Wall Street companies and don’t have a lot of excess capacity on the non-performing residential side.”

It my sense that many front-liners in the default space don’t yet see this change coming — they’re too busy keeping up with the workload that’s in front of them. But it may be time for senior executives in the default management industry to start looking at where the money’s headed; with the sort of dollars now sitting on the sidelines and waiting to jump in, the landscape for default servicing will likely change dramatically in the months ahead.

Radian Guaranty Inc. said late Thursday that mortgages originated under so-called “stated income” and “stated asset” programs will no longer be eligible for mortgage insurance — for all borrowers, including those that are self-employed.

In a message sent to clients this week, Radian said that “while certain forms of alternative documentation used to verify assets and income are appropriate with a disciplined underwriting process, the stated programs will no longer be insurable as a result of poor performance.”

The change to eliminate SISA programs will go into effect at the end of April, the insurer said. Other policy changes, including adjustments to loan-to-value, documentation and FICO requirements, will go into effect at the end of this month. In addition to guideline changes, Radian also said it had updated its list of so-called “declining markets,” in which strong restrictions on underwriting new policies will be in place — the list is 138 pages long.

“These changes reflect the current market conditions and a commitment to our business partners and shareholders to write new business that will allow homebuyers appropriate and affordable alternatives,” said Dave Applegate, president of Radian Guaranty.

“The continued weakness in the housing market and overall economy has created unprecedented challenges for the industry and our clients. It is critical that we act quickly to assist our clients in producing high quality, profitable business. Accordingly, we have tightened guidelines and increased pricing in areas in which we continue to see deterioration in our risk adjusted returns.”

Radian lost $618 million during the recent fourth quarter, absorbing a huge increase in loss reserve charges tied to expected losses on the loans it had insured.

For more information, visit http://www.radian.biz.

Disclosure: The author owned no positions in RDN when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Freddie Mac’s top economist said Thursday that he doesn’t expect to see housing rebound from its current downtrend until 2010, according to a report published by McClatchy newspapers. Speaking at the National Economists Club, Frank Nothaft, chief economist at the GSE, offered a bearish take on the current state of housing in most markets nationwide.

From the story:

“I don’t think we’re going to see any improvement in the national house-price matrix until 2010,” said Nothaft, a respected government economist who’s followed the national housing market for more than two decades.

He projected a 16 percent drop in mortgage originations this year, for new home loans and refinancing. He expects foreclosures, which rose by about 1.5 million in 2007, to increase even more this year

If there was any good news in the stark snapshot of the housing crisis, it came from a bit of really bad news. The Freddie Mac economist thinks that new single-family home starts this year will be the lowest in 50 years, back when Dwight D. Eisenhower was president.

That bad-is-good thing, of course, comes from the fact that most economists believe that new housing starts need to fall that far in order to clear a massive inventory overhang. And it should be noted that Nothaft was referring to a recovery in prices moreso than discussing sale volume trends.

Nonetheless, the remarks represent the most bearish take yet by anyone at either Fannie Mae or Freddie Mac.

Nothaft said there was a 50 percent chance of a recession in 2008, although he also noted we “may be in a recession already.” Part of the current problem in mortgages, he suggested, lies with the fact that subprime and Alt-A share of total originations quadrupled between 2001 and 2006.

In 2001, subprime was just 5.4 percent of $2.2 trillion in loan originated that year — by 2006, that percent had grown to more than 20 percent of the entire market. Likewise, Alt-A saw its share rise from 2.7 percent to 13.4 percent within the same time frame.

(H/T, Calculated Risk)

First American CoreLogic released its latest housing price index values for February on Friday, which found that housing prices continued to drop steeply in key areas throughout the United States.

“Twenty-eight states now show year-over-year real estate declines according to this latest LoanPerformance HPI release,” said Damien Weldon, vice president, collateral and prepayment analytics for First American CoreLogic. “However, on a quarter-over-quarter basis, there are now thirty-six states with decreasing property values.”

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The illustration to the right illustrates the quarterly price performance for each state.

Las Vegas and Cleveland, OH posted the worst price performance over the three month period from December to February, according to the Loan Performance data; Sin City registered a 7.34 percent decline in housing prices, while Cleveland saw prices fall 7.5 percent.

Both represent an interesting contrast in the nature of the problems now confronting the U.S. housing market: one was a strong center for housing speculation during the recent boom, while the other has been dealing with the effects of a long-weakened local economy.

On an annual basis, some of the hardest hit areas include Riverside/San Bernardino/Ontario, Calif. (-19.95 percent) and Cape Coral/Fort Myers, Florida (-17.76 perecent). Numerous major markets in California are into double-digit negative price performance as well, CoreLogic said — places like Los Angeles, Oakland, San Diego.

Despite the generally gloomy performance nationally, a few areas posted both quarterly and annual pricing gains, CoreLogic said. The Dallas-Fort Worth metroplex and Austin areas in Texas both posted positive performance. The DFW area saw prices remain flat through February, but up 3.71 percent on an annual comparison basis; Austin saw prices increase 1.2 percent, yielding a 7.7 percent price increase year-over-year.

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

Fidelity National Information Services, Inc., which has been looking to spin-off its mortgage processing businesses, said in a filing with the Security and Exchange Commission Thursday that proposed new rules governing the appraisal process, along with other industry regulation, could hurt its mortgage processing subsidiary.

Fidelity National said that the new rules “could have adverse consequences that could affect our business,” in outlining pending regulation as a key risk factor; the company singled out a discussion of the proposed appraisal rule changes in outlining some of the risks its business faces. The financial data processing giant has been seeking approval from federal regulators to take its mortgage processing unit, Lender Processing Services Inc., public later this year.

The LPS unit accounted for nearly 10 percent of FIS’ $4.8 billion in total revenue last year, and provides the technology platform — known in the industry as MSP — that is used to service more than 50 percent of the nation’s mortgages. LPS also includes the company’s default outsourcing businesses, spanning foreclosures, property preservation and asset management, as well as the company’s transactional real estate business spanning title insurance operations.

The appraisal business is set to undergo significant change, after a landmark settlement agreement was announced in early March that will see both Fannie Mae and Freddie Mac likely eliminate broker-ordered appraisals and reduce the use of appraisals prepared in-house or through captive appraisal management companies in underwriting mortgages.

It’s worth noting, however, that despite the warning, Fidelity may stand to gain substantially from the new appraisal rules as well. Its LPS business unit operates one of the nation’s largest independent appraisal operations, meaning it could see a huge uptick in business early next year when the new regulations go into effect.

The company said it intends to comment on the proposed appraisal regulations before an April 30 deadline set by Fannie and Freddie.

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

The New York Times is reporting that the FDIC has ruled Fremont General’s banking unit under-capitalized and must find additional funds or sell the unit in two months. Fremont, which should be considered the bastion of terrible underwriting, received default notices related to $3.15 worth of subprime loans. And we’re talking SUBPRIME. Fremont was known as the “get it done” place of last resort for many of the most subprime loans. My favorite was their self-employed borrower guidelines. If you were self-employed and couldn’t prove a) your income or b) you actually owned a business you could state your income (like everyone else) and use 3 letters of reference if you couldn’t produce say a business license or any documentation that you actually were in business for yourself. Seems like good, commonsense underwriting to me!

The New York Times on Fremont’s FDIC call for recapitalization:

The Fremont General Corporation, the mortgage lender, said Friday that banking regulators declared its banking unit undercapitalized and had required the company to raise money or find a buyer in two months.

Fremont, which earlier this month received default notices related to $3.15 billion of subprime mortgages and said its survival could be threatened if it were sued, said that the company had received a directive from the Federal Deposit Insurance Corporation requiring it to take corrective action by May 26.

Those actions may include selling shares or other obligations in order to recapitalize its banking unit Fremont Investment and Loan, divesting the bank, or accepting an offer to merge or be acquired.

Troubled bank and mortgage lender Fremont General said on Friday that Federal regulators had stepped in and given it 60 days to raise additional capital, or face a forced sale. The Federal Deposit Insurance Corporation issued a so-called Supervisory Prompt Corrective Action Directive to Fremont General and to Fremont General Credit Corporation, the company said, requiring the bank to take immediate steps to recapitalize.

In March of last year, the FDIC issued a Cease and Desist Order to Fremont regarding its subprime lending operation, including an allegation that the company violated Section 23B of the Federal Reserve Act by engaging in transactions with its affiliates on terms and under circumstances that in good faith would not be offered to, or would not apply to, nonaffiliated companies.

Under the terms of the new directive by its regulators, the bank has 60 days to either raise enough equity capital or otherwise sell obligations in order to reach FDIC-required levels for “adequate capitalization,” or either be acquired and/or divest itself of the bank altogether.

Fremont has been caught up in the latest round of industry turmoil, saying in late February that write-downs and loss reserve charges had eroded its capital base; since that time, it has defaulted on loan purchase contracts worth $3.15 billion and delayed an interest payment on $169 million in debt.

In the directive, the FDIC categorized Fremont as being an “undercapitalized” depository institution, and established restrictions limiting the interest rates the bank may pay on deposits, among other restrictions designed to protect consumers and prevent further outflow of capital from the bank itself. The FDIC-mandated restrictions would remain in place for up to four quarters, if and when Fremont is able to successfully recapitalize.

Clearly, this is one bank that both FDIC officials and consumers alike would not want to see fail, given Fremont’s nearly $9 billion in assets. Shares in the troubled financial services had fallen nearly 13 percent in early trading on the New York Stock Exchange, to $0.53; any share price below one dollar is generally considered highly speculative.

Disclosure: The author owned no positions in FMT when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Falling home prices and inappropriate mortgage underwriting have grabbed the headlines and much of the blame for mortgage credit woes in recent months, but the rise of mortgage fraud may end up being the lasting story that lives on when the current crisis is gone. New research released Thursday predicts that losses from mortgage fraud will reach a stunning $2.5 billion in 2008 alone, and that comparable losses will continue for several years thereafter.

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TowerGroup, which conducted the study, said that mortgage fraud is difficult to track and takes many forms — for example, fraudsters cheating borrowers out of their properties with false promises of foreclosure avoidance, or using the identity of a real person to fraudulently purchase one or more properties. The graphic to the right categorizes the different motives and methods of mortgage fraud.

“Much of the growth in mortgage fraud has been due to the ever-increasing sophistication of fraudsters’ schemes to fabricate the values of mortgaged property,” said David Hamermesh, senior analyst at TowerGroup. “Fraud prevention is best done proactively, before the loan closes. Lenders must invest in analytical tools to identify loans at a high risk for fraud, while technology vendors must do more to improve the predictive power of the analytical tools they provide.”

According to statistics from the Federal Bureau of Investigation, the growth rate in filings of Suspicious Activity Reports (SARs) related to mortgage fraud rose to 56 percent annually between 2002 and 2007 from its previous average of 26 percent annually from 1996 to 2002.

“Technology companies that offer fraud detection solutions will need to develop professional services capabilities to provide lenders with file reviewers who are trained in assessing possible fraud,” suggested Hamermesh. “This service can supplement a lender’s own underwriters and be an efficient way to evaluate those loans flagged as most risky by automated scoring tools.”

We see plenty of tech vendors’ press releases here at HW — and most are for some very cool new high-tech solution designed to weed out fraud. I can’t recall ever seeing one vendor step in and say they’d provide begin bundling consulting with their various tech platforms. If Hamermesh is right, that may be where fraud management is headed next.

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

ForeclosuresMass.com, a statewide provider foreclosure data for investors, real estate professionals and mortgage brokers, said Thursday that it expects foreclosures in the states to increase by as much as 25 percent during 2008.

“2007 was the worst year in history for Massachusetts homeowners, and our forecast for 2008 is even gloomier,” said Jeremy Shapiro, president and co-founder of ForeclosuresMass.com. “2007 ended with two consecutive record quarters, and the surge is continuing this year, making it nearly impossible for regulators to act in time. Homeowners facing foreclosure should not wait for a miracle cure, they should work closely with professionals experienced in dealing with pre-foreclosure situations – time is not a resource.”

During March, foreclosures are up in 282 of the state’s 351 communities, according to ForeclosuresMass; 74 communities experienced at least a 75 percent jump in foreclosure filings during the past 12 months, Shapiro said. Overall, 31,516 homeowners faced foreclosure in the past 12 months, a statewide increase of 45.6 percent.

“Based on the latest Massachusetts data and our extensive knowledge of foreclosure trends, coupled with other national reports and Federal Reserve Chairman Ben Bernanke’s comments earlier this month, ForeclosuresMass.com projects that 2008 Massachusetts foreclosure filings will surpass 2007 levels by 15 to 25 percent, and that at least 34,500 additional Massachusetts homeowners will enter the foreclosure process,” said Shapiro.

Lenders initiated 31,516 foreclosures statewide against homeowners in the 12 months from March 1, 2007 to February 29, 2008, a year-over-year increase of 45.60 percent. February saw 2,861 filings — the 4th highest month on record — representing nearly a 29 percent above February 2007 levels, according to data released by the firm.

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

Radian, the mortgage insurance company, will no longer provide insurance for stated income and stated asset loans.  The loans, sometimes called “liar loans” by skeptics, allow borrowers to simply conjure their income and assets used for qualification without any due diligence checking.

This may signal the tipping-point of a major sea-change in underwriting standards. While many banks have eliminated the stated income, stated asset loans due to poor performance or otherwise, the insurance companies jumping in to the act would all but guarantee the extinction of stated/stated loans in the conventional and jumbo markets. The stated loans may end up only being available through private channels and “hard money”.

This would be a major blow to the already struggling mortgage market, where a large portion of borrowers in the bubble areas (CA, FL, NV, etc.) hold loans that they would not qualify for using traditional full income and asset documentation.

From the Market Watch story on Radian discontinuing insurance for stated income, stated asset loans:

Radian Guaranty Inc. will not insure mortgages originated under “stated income” and “stated asset” programs starting April 30, the mortgage insurer said late Thursday. “While certain forms of alternative documentation used to verify assets and income are appropriate with a disciplined underwriting process, the stated programs will no longer be insurable as a result of poor performance,” said Radian in a message to clients. Stated income mortgages are loans that don’t require documentation of a borrower’s income. Radian Guaranty is the mortgage insurance subsidiary of Radian Group .