Refinance Free Credit

Old National Bancorp (ONB: 17.35, -4.67%) said Monday that it would take a $21.9 million hit to its loan loss reserves when it reports first quarter earnings on April 28 — and said that it had pegged $17 million of the expected charges to loans administered by one single loan officer, who (not surprisingly) is no longer with the company. The company said it was investigating for misconduct, but did not identify the former employee by name.

The second item that will impact the Company’s first quarter results is the benefit from an approximate $6.6 million reversal of income tax expense.

“Because the condition of several loans in the former officer’s portfolio deteriorated in the first quarter, the company conducted an investigation pertaining to certain activities of the former officer,” Old National said in a press statement. “The findings included falsified documentation, misconduct and other violations of the company’s lending policies by the former officer that contributed to downgrades of several credits.”

Old National said it had turned the case over to the Federal Bureau of Investigation, and that it believed the actions of the former employee in questions did not “represent systemic issues within the company’s commercial loan portfolio or a breakdown of internal controls over financial reporting.”

“This is a very frustrating situation,” said president and CEO Bob Jones.

“We attained a solid 2007 performance in a challenging environment and were one of a few banks who actually saw an improvement in nonperforming loans over the last three quarters. Obviously, the current situation alters that trend due to circumstances not related to the subprime and mortgage crisis that many banks face today, and we remain confident that the operating fundamentals of the company remain strong.”

The bank said it could not forecast the impact of the loss provision on its 2008 earnings guidance, citing “remediation avenues available to the company.”

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

While subprime-related write-downs have been — and will likely continue to be — prevalent among many banks’ earnings releases, the subprime and related mortgage mess has been mostly an issue for larger banks. National banks including the likes of Washington Mutual, Wachovia, Bank of America, Wells Fargo and others have had to absorb the effects of the industry downturn to a greater extent than mid-size and community banks.

A new report released Monday by credit rating agency A.M Best, however, found that credit risk may quickly be beating a path to the door of smaller regional and community banks. In particular, with the exception of some states — notably Texas — the agency warned that “a pattern of distinct regional credit issues is emerging that is reminiscent of the real estate crisis in the mid-1980s.”

“Smaller banks are directly or indirectly facing credit problems with consumer mortgages, similar to the largest 200 banks,” the report said. But when disregarding the largest 200 banks, commercial real estate risk becomes the leading contributing factor to credit risk for mid-size and small banks, A.M. Best said.

Construction & land development loans, corporate & industrial loans, credit cards, multi-family residential loans and commercial real estate loans are all high-risk areas in smaller banks’ credit portfolios, according to the report.

For the smaller banks below the top 200 institutions, high nonperforming asset rates are concentrated in the Midwestern, Central, Southeastern and West Coast regions; Alaska, Arizona and Arkansas rank as the worst three states on overall asset quality.

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

Traditional U.S. asset backed commercial paper programs significantly reduced exposures to collateralized debt obligations and residential mortgage collateral throughout 2007 and into the first quarter of 2008, Fitch Ratings said Monday.

An analysis by the rating agency found overall exposures to CDOs and residential mortgage collateral contracting at a much faster pace than the overall ABCP market since the start of 2007, and non-mortgage consumer assets — along with corporate exposures — growing substantially.

Results of Fitch’s portfolio composition analysis indicated that total residential mortgage exposure declined 59 percent on a dollar basis to $9.4 billion since the end of 2006. Over the same period, CDO exposures across Fitch’s rated U.S. multiseller and securities-backed universe fell 24 percent to $13.9 billion.

Overall ABCP outstandings have declined by more than 27 percent during the same period and 35 percent since peaking in July, Fitch said.

As a share of total traditional program outstandings, residential mortgage collateral now comprises approximately 4.2 percent and CDOs represent 6.2 percent — indicating just how quickly mortgage-related assets have fallen out of favor.

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

Ohio governor Ted Strickland on Monday announced non-binding agreements with nine key mortgage servicers over their loss mitigation efforts, touting the pact as a “historic day in the state of Ohio.”

The Dayton Daily News, which originally reported on the agreements, said that Strickland was joined by Ohio Mortgage Bankers Association president Bill Cosgrove in announcing the new pacts between the state and key servicers.

From the report:

About 55 percent of Ohio home loans are with the nine companies, Kimberly Zurz, state Commerce Director said …

Cosgrove declined to comment when asked if the companies would have signed had the agreements been binding, with sanctions for violations.

Strickland said the companies have put their “honor and prestige on the line.”

“No one said the Declaration of Independence was legally binding but a lot of people paid attention to it,” Strickland said, quoting his legal counsel Kent Markus.

The pacts come as part of the state’s “Save the Dream” homeownership preservation effort.

Servicers agreeing to the pact included Carrington Mortgage Services, Citi, GMAC Residential Capital, HSBC Finance Corp., Ocwen Financial Corp., Option One Mortgage, Saxon Mortgage Services, Select Portfolio Servicing, and Litton Loan Servicing.

The participating servicers have agreed to terms that will see them engage in “substantial and large-scale loan modifications” for adjustable-rate and subprime mortgage holders, as well as making proactive attempts to contact at-risk borrowers and establishing incentives for both staff and foreclosure counsel to modify loans rather than foreclose. The companies also agreed to report on their progress to the state’s Commerce Department.

Beyond the reporting on progress part, I don’t really know what else here is really all that new. Substantial loan modifications, to the extent permissible under contractual obligations? Making efforts to contact at-risk borrowers? Incentivizing attorneys to find a workout prior to the foreclosure sale? These sort of things are — at least on paper — the very definition of modern loss mitigation in mortgage banking.

I suppose the devil here ultimately lies in the details of how loss mitigation is executed. After all, we don’t have any idea what the definition of a “substantial” volume of loan modifications is.

Some of the servicers on this list are generally better at the loss mitigation function than others, because the systems, policies and procedures put into place at one shop can differ pretty significantly from the next. I won’t disclose who falls where on the totem pole, or where each of the above shops differs in process — but I will say that if agreements like this can reinforce an existing commitment, for borrowers and servicers alike, that’s often a very good thing.

Washington Mutual Inc. (WM: 13.18, +29.60%) is nearing a deal for $5 billion in investment from the likes of private-equity titan TPG, according to a report published Monday in the Wall Street Journal. Shares of the Seattle-based bank soared on the news, jumping up nearly 35 percent in heavy trading Monday morning.

From the WSJ:

TPG’s effort could be viewed as an encouraging sign for the nation’s ailing banking system, and Wall Street will be watching to see whether it is an indication that the worst is over …

While banking regulators were likely apprised of WaMu’s plans, the government was not directly involved in forging a deal as in the recent purchase of Bear Stearns Cos., say people familiar with the matter.

As currently envisioned, the $5 billion investment would be structured as both a common- and preferred-stock offering.

WaMu has been hit hard as the mortgage crisis has continued unabated, and $1.84 billion loss for the fourth quarter in January due largely to increasing loan loss reserves.

The bank’s portfolio includes $57 billion in option ARM mortgages; so-called negative amortization loans have been a fast-increasing source of losses for lenders as housing prices have fallen in key markets throughout the United States and put millions of borrowers in the position of owing more on their mortgage than their home is worth.

The plans at WaMu would likely eliminate any consideration that the Seattle-based based would be acquired by a larger financial institution, the WSJ reported. TPG would also likely receive a seat on the company’s 14-member board.

HW had reported on market rumors that Wall Street bank JP Morgan Chase was looking at a potential purchase of Washington Mutual in January.

WaMu has not commented to the press on the report, and did not return a phone call from Housing Wire seeking comment by the time this story was published.

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

This post is from the Blown Mortgage Hall of Fame.  It originally appeared back in July 2007 on my series on credit.  Now more than ever your credit score is vital to securing financing.  I’m on vacation from Saturday until Tuesday the 15th so enjoy some of the classics while I’m gone. 

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In part 1 of this series on credit we talked about how important credit has become in surviving the current home depreciation environment and avoiding the ARM Reset Foreclosure Trap. Now that you know (hopefully) how important credit is to protecting yourself and family from foreclosure it’s time to look at the elements of credit to understand the factors that affect your score. You’ll use this understanding to your advantage in parts three and four as you work to improve your credit score both organically and through 3rd parties.

Credit Series Overview

1. Why credit is so important
2. Understanding elements of credit
3. Improving your score organically
4. Improving your score using 3rd party help
5. Managing your score

Elements of Credit

Payment History - 35% of score

You might expect payment history to account for more; but in fact it only contributes to 35% of your credit score. It is however the most significant contributor out all the elements that are used in your score calculation. Late payments, charge-offs and judgments are all factors that have a negative impact. Missing high-balance payments have a larger impact than missing low-balance payments. Further, if you miss a mortgage payment you hurt your credit in two very critical ways:

1. You incur a late payment on your highest-balance credit account causing the greatest harm to your score.
2. You drop a credit grade on loan underwriting matrices limiting your loan options and increasing your interest rates.

Finally, most weight is given to your payment performance over the last two years. Older delinquencies are still a factor but are weighted less. If you maintain a clean payment history on your credit accounts for at least 24 months you stand a much better chance at getting lower interest rate, higher LTV loans. Which is exactly what you need access to when trying to avoid the ARM Reset Foreclosure Trap.

Current Credit Balances - 30% of Score

Credit balances are used to calculate the ratio of your credit used compared to the total amount of credit available to you for revolving credit accounts. To calculate this number simply take the total amount of money spent on an existing credit card and divide it by the card limit, then multiply that number by 100. This is your credit utilization percentage for that particular card. For example:

Credit Limit on VISA: $15,000
Current Balance: $10,000

$10,000 / $15,000 = 0.67 x 100 = 67% utilization rate

In the above example you have used 67% of the credit available to you, leaving you little remaining credit. This will negatively impact your credit score. While the ideal utilization percentage is somewhat debatable depending on who you talk to; most experts agree that utilization percentages below 50% (and definitely below 30%) favorably impact your score. In fact simply reducing your outstanding credit on any particular account from 51% to 49% has shown to provide significant score improvement.

Credit History - 15% of score

Credit history refers to the length of time that each credit account is open.  An account in good standing that has been open for 5 years carry much more weight on your score than an account in good standing open for 4 months.  The track record of your payment history is weighted to present a truer picture of your repayment habits.

Type of Credit - 10% of score

Credit bureaus frown on large amounts of debt from any one segment of financing.  Too much credit card debt will impact your score; too many auto loans can have the same effect.  The credit score is meant to paint a picture of responsible credit use.  If you carry 10 credit cards with high balances your score will be impacted; even if you make all of your payments on time.  That is because the excess debt burden makes you a higher risk for potential delinquent payments.

Inquiries - 10% of score

The dreaded credit inquiry.  Yes, they really do impact your score.  The total number of inquiries is evaluated over a 6 month period.  The first 10 inquiries can impact your score - anywhere from 2 to 25 points per inquiry!  This is a massive range.  It is no wonder why your gut says that credit inquiries are a bad thing.  Credit inquiries are factored in to your score because credit bureaus want to penalize people who are desperate for credit.  If you are applying for, and being denied, credit all over town that process is going to take its toll on your credit score.

There are two common misconceptions about credit inquiries that you should be aware of:

1. All inquiries on my credit report are bad.  FALSE. If you make an inquiry in to your own credit history it is not seen as a negative.  In fact, you should personally check your credit every 6 months; and at least once a year to ensure its accuracy.
2. Too many inquiries on my credit report are bad.  FALSE.  Too many inquiries over a long period of time are bad.  Credit repositories allow a 14-day shopping window for consumers shopping for products that require a credit check.  In this 14-day window you can have multiple inquiries in to your credit history with out a negative impact on your score.  With out this type of grace period no one would be able to shop competitors for financed items such as home loans, car loans, and financed home furnishings, appliances and electronics.  The damage is done when you repeatedly seek credit on an ongoing basis.

It is important to remember that the credit bureaus use an algorithm to determine your credit score; and they all have slightly different formulas which is why your score differs from each of the three major bureaus.  In the next segment I’ll talk about strategies to improve your credit score organically with out the help of outside parties.  You’ll be able to use your knowledge of the scoring model covered today to effectively manage your credit use to improve your score.

Remember, we’re trying to achieve the best credit score possible before we are forced to refinance.  A high credit score gives us our best chance at leveraging high loan-to-value mortgage products to get us out of adjusting ARM loans - avoiding the ARM Reset Foreclosure Trap.

If you’d like a free white paper on the elements of credit and how they impact your borrowing power please email me at morganb@blownmortgage.com.

As hedge funds look to swoop into the mortgage market — HW’s sources suggest that managers see troubled mortgage debt as probably the hottest distressed asset opportunity in a decade — more than a few new servicing shops are springing to life to handle the increased workload.

One such newcomer is Acqura Loan Services, a special servicing outfit that is aiming specifically to target the needs of lenders, hedge funds and investors in distressed debt, according to a press statement released Monday morning.

“At this stage in the credit cycle, lenders, Wall Street and MBS/ABS investors realize they are facing a triple threat: the prospect of recession, the credit/liquidity problems and falling home prices,” said David Vida, CEO of both Acqura and its parent, the Strategic Recovery Group, LLC. Vida, a former executive at Option One Mortgage Company, said that the players now entering the mortgage space are looking for a different kind of approach to servicing that what traditionally would be expected.

“What investors and issuers are looking for now are focused, innovative partners, who can commit to higher service levels and deliver experienced asset managers and the latest technology to achieve better outcomes for both borrowers and investors,” he said.

Industry insiders that HW spoke with agreed, and said that they feel many traditional servicing outfits are stretched to the limit by both existing processes and a flood of troubled borrowers.

“There’s a real need right now for a different kind of servicing, the high-touch approach of working with borrowers that many existing shops are sort of constrained in providing,” said one source, a hedge fund manager who asked not to be named. “We’re looking to make sure that we can protect returns on the assets we acquire, and that means taking a different road in terms of what we want out of the servicers we’ll work with.”

Acqura, which said it began hiring personnel and developing proprietary scoring and servicing technology in mid-2007, currently has three special servicing clients. The company said it specializes in working to develop a customized risk-management solution for each client’s objectives, and has focused on hiring only experienced personnel; REO asset managers at the company have an average of 12 years of experience, for example.

Acqura isn’t the only new entrant into what promises to be a competitive market over the next few years. Phoenix-based Marix Servicing, LLC was founded in February 2007 and has taken a similar tack, employing a “high-touch” special servicing model to help investors manage distressed assets in the subprime mortgage market. Marix is backed by Marathon Asset Management, LLC, a $9.5 billion private equity firm.

“Typically, loss mitigation begins when something bad happens,” explained Acqura’s Vida. “Our approach will allow us to be more proactive in anticipating events, such as resets or deteriorating credit, and to establish a profile and, hopefully, a dialogue with the borrower before the situation escalates.”

“Our high-touch approach is designed to encourage cooperation from the borrowers, and to offer them customized payment plans and loan modification options to help them stay in their homes, if they want to and can afford their payments,” he said.

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