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New guidance was published Monday by the Office of Federal Housing Enterprise Oversight on an accounting standard used to determine procudures and protocol for so-called fair-value accounting methods. The standard in question, FASB 159, is a companion to FASB 157; both standards govern the election to carry almost any financial instrument at “fair value.”

Housing Wire contributor Linda Lowell wrote a detailed piece on FASB 157 last week, for those who missed it; it’s important reading in light of OFHEO’s new guidance.

That OFHEO would choose right now to issue guidance on FASB 159 — ahead of each GSE’s first quarter earnings report, and after the full effective date last November — rose more than a few eyebrows among sources Housing Wire spoke with.

“It reads like a warning,” said one source, who asked not to be named.

“There isn’t anything in the guidance that makes you say wow, this is really new,” said another source, on condition of anonymity. “So the question becomes whether OFHEO has some reason for concern.”

From the published guidance on use of the fair-value option, or FVO:

… if an Enterprise elects the FVO for its own debt and its creditworthiness deteriorates, it will recognize a gain in earnings and an increase in the statutory measure of core capital. In such a circumstance, OFHEO will take into consideration this contrary or inappropriate adjustment to core capital in assessing capital adequacy.

Further, if OFHEO detects patterns of use of the fair value option that impair transparency or distort earnings or capital, OFHEO will evaluate whether such application of the FVO is unsafe and unsound.

OFHEO may take action to respond to an Enterprise’s use of the fair value option in situations where risk management or controls are deficient or when it raises other safety and soundness issues, even if the option is complies with the accounting standard.

“It is important that Fannie Mae and Freddie Mac apply fair value in a sound and consistent manner,” said OFHEO Director James B. Lockhart. “Although Fannie Mae and Freddie Mac are using fair value for only a portion of their assets and liabilities, the use of fair value should help dampen fluctuations in earnings caused by their large derivative portfolios,” he said.

Purely on a speculative basis, we have to think that Lockhart and OFHEO examiners have some degree of concern that “dampening fluctuations in earnings” could turn into “earnings management” — a road that probably feels all too familiar.

Federal Reserve Board Governor Randall Kroszner said on Monday that “a lack of information and insufficient due diligence” were at the root of the U.S. subprime mortgage-backed securities debacle, and suggested that greater standardization would likely be the key to reviving a secondary market that have been stuck in the deep freeze since late last year.

“When market participants realize that they do not have the information necessary for proper valuation of risks, market liquidity can become impaired, such as in the CMO market in the 1990s and in the subprime market recently,” Krozner said in remarks to the Community Reinvestment Fund First Annual Forum in Minneapolis.

Krozner likened the current secondary market crisis to a collapse of the collateralized mortgage obligation (CMO) marker in the early 1990s, and said that restoring market confidence in subprime RMBS and asset-backed CDOs would “likely take time.”

“As in the case of today’s market for residential mortgage-backed securities, the general market reaction was a flight away from these instruments [CMOs],” he said. “Increased information and standardized pricing conventions, such as the use of option-adjusted spreads, moved these instruments from the experimentation and learning phase to broad market acceptance.”

It’s an interesting argument, and one that contrasts with the notion that large parts of the MBS and derivative markets are dead and not coming back.

“More-detailed data will need to be collected in a more systematic manner” and “investments will need to be made to warehouse and model data” related to RMBS, Krozner suggested, noting that “the payoff from these activities will be a greater understanding of risks and greater ability to value the instruments.”

More than a few sources that have spoken with Housing Wire over the past few months have suggested a similar sentiment, saying that the secondary market for mortgages is simply too large and — over the long term — too profitable for investors to simply bypass altogether.

To be sure, it isn’t exactly a sentiment that is shared equally by all market participants. Some have suggested that CDOs will never come back after the current financial debacle, and that subprime mortgages will once again be relegated to so-called hard-money lending. But if history is any indicator, the truth — as with most things — will likely lie somewhere in the middle.

That process of learning that Krozner referred to is what now has hundreds of billions of dollars worth of private capital waiting in the wings and ready to pounce on now-devalued mortgage-backed securities, the indexes they make, or even whole loan pools themselves. This new breed of distressed asset purchasers is uniquely focused on mortgages, for one thing — because the market has learned that even the most basic assumptions don’t carry across asset classes — and has commissioned much of its own research, rather than relying on a rating agency’s particular work in the area.

Will it work? Time will tell, but the back half of this year should be instructive, even as the housing mess seems likely to roll onward.

Loss mitigation technology is among the hottest in the entire mortgage sector, as the number of troubled borrowers continues to mushroom — and as policymakers and industry regulators lean on servicers to find new and creative ways of working with consumers, technology companies are moving quickly to deliver solutions that can help servicers manage the quickly-increasing workload more effectively.

Wolters Kluwer Financial Services and Fidelity National Information Services (FIS: 37.98, -0.24%) are the latest to push forward with a partnership in this area; both companies said Monday they plan to integrate Wolters Kluwer’s loan modification document solutions and compliance content into the loss mitigation module of Fidelity National Information Services’ well-known Desktop platform.

FIS Desktop is a work flow, document and expense management system that supports the post-origination loan cycle for lenders, servicers and investor; the platform’s loss mitigation module is is integrated with the ubiquitous Mortgage Servicing Package (MSP) platform, also owned by Fidelity, as well as other servicing platforms.

The integration will provide servicers with an ability to generate federal and state compliant documents on a nationwide basis, the companies said in a joint press statement; it will also enable servicers to customize loan modification documents and packages as needed, and provide the FIS platform with the ability to implement custom document requirements pushed through by investors or regulators.

“The complex array of investor requirements tied to loan modifications can sometimes slow servicers’ progress in helping their borrowers avoid foreclosure,” said Jason Marx, vice president and general manager, Mortgage, Wolters Kluwer Financial Services. He characterized the partnership as a way for servicers to implement loan modification programs with confidence, knowing that “each transaction is compliant with investor and any future regulatory requirements.”

Laura MacIntyre, COO for the FIS Desktop group at Fidelity, said that her team partnered with Wolters Kluwer because of the company’s “compliance strength and ability to rapidly set up customized loan modification agreements and packages that meet investor requirements.”

Neither company provided details on when the proposed integration was expected to be complete and available in production.

For more information, visit http://www.wolterskluwerfs.com and http://www.fidelityinfoservices.com.

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

Two hundred and fifty-seven percent.

That’s how much higher cumulative losses to date on 2007 vintage home-equity lines of credit were during March, when compared to the same time frame for the 2006 vintage. It’s an increase that comes despite a surprising month-to-month decrease in delinquencies for 2007 HELOCs, according to a report released Monday afternoon by Standard & Poor’s.

HELOCs are proving increasingly problematic for lenders, S&P said — and, in particular, the 2006 and 2007 vintages. For example, 11.45 percent of 2006 vintage HELOCs were delinquent at the end of March, with 6.34 percent of the aggregate pool balance categorized as seriously delinquent. (Serious delinquencies refer to loans 90+days in arrears, in foreclosure, or in REO.)

Serious delinquencies, often a direct harbinger of pending losses, rose more than 8 percent for 2005 and 2006 vintage HELOCs during March, according to the report.

The S&P report comes on the heels of recent first quarter earnings reports at banks that found just how problematic home equity lending really can be — just ask Bank of America Corp. (BAC: 37.42, -2.96%), or National City Corp. (NCC: 6.05, -27.37%).

Alt-A gets a failing grade
While HELOCs are generating much of the attention this earnings season, Alt-A mortgage performance continues to tumble — at a rate that is now faster than the descent being recorded in the subprime RMBS space. More than 10 percent of remaining 2007 vintage Alt-A mortgages reached the delinquency bucket during March, S&P said, an increase of 7.5 percent since February alone.

Serious delinquencies reached above 10 percent for 2006 Alt-A mortgages during March, as well — meaning that the 2006 vintage is likely the first Alt-A pool on record with delinquencies and severe delinquencies north of 10 percent, simultaneously. And while losses are accelerating for the 2006 vintage, they’re moving even faster for 2007 Alt-A pools: delinquencies rose 12.2 percent in March, and serious DQs by a stunning 18.9 percent.

It’s clear at this point that the 2007 vintage will go down across the board as perhaps the worst vintage in modern securitized mortgage history, something Housing Wire first speculated on way back in August of last year.

While losses are now both noticeable and relevant for both HELOCs and Alt-A mortgages, S&P’s data also shows potential trouble brewing in prime jumbos — the name given to securitized mortgages north of the traditional $417,000 conforming lending limit, and without the exotic features that define Alt-A mortgages.

S&P said that total delinquencies for prime jumbos originated in 2006 rose 15.4 percent during March, while the 2007 vintage saw DQs ratchet upward by 15.5 percent — keep in mind, that’s on a monthly comparison basis, to boot. Serious delinquencies rose even higher, to 22.6 percent for the 2006 vintage and 18.8 percent for the 2007s.

While cumulative losses in prime jumbos haven’t yet reached levels that should immediately concern investors, the speed with which even prime jumbos are now headed into delinquency is a trend that every mortgage market participant should keep a close eye on.

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

Two hundred and fifty-seven percent.

That’s how much higher cumulative losses to date on 2007 vintage home-equity lines of credit were during March, when compared to the same time frame for the 2006 vintage. It’s an increase that comes despite a surprising month-to-month decrease in delinquencies for 2007 HELOCs, according to a report released Monday afternoon by Standard & Poor’s.

HELOCs are proving increasingly problematic for lenders, S&P said — and, in particular, the 2006 and 2007 vintages. For example, 11.45 percent of 2006 vintage HELOCs were delinquent at the end of March, with 6.34 percent of the aggregate pool balance categorized as seriously delinquent. (Serious delinquencies refer to loans 90+days in arrears, in foreclosure, or in REO.)

Serious delinquencies, often a direct harbinger of pending losses, rose more than 8 percent for 2005 and 2006 vintage HELOCs during March, according to the report.

The S&P report comes on the heels of recent first quarter earnings reports at banks that found just how problematic home equity lending really can be — just ask Bank of America Corp. (BAC: 37.42, -2.96%), or National City Corp. (NCC: 6.05, -27.37%).

Alt-A gets a failing grade
While HELOCs are generating much of the attention this earnings season, Alt-A mortgage performance continues to tumble — at a rate that is now faster than the descent being recorded in the subprime RMBS space. More than 10 percent of remaining 2007 vintage Alt-A mortgages reached the delinquency bucket during March, S&P said, an increase of 7.5 percent since February alone.

Serious delinquencies reached above 10 percent for 2006 Alt-A mortgages during March, as well — meaning that the 2006 vintage is likely the first Alt-A pool on record with delinquencies and severe delinquencies north of 10 percent, simultaneously. And while losses are accelerating for the 2006 vintage, they’re moving even faster for 2007 Alt-A pools: delinquencies rose 12.2 percent in March, and serious DQs by a stunning 18.9 percent.

It’s clear at this point that the 2007 vintage will go down across the board as perhaps the worst vintage in modern securitized mortgage history, something Housing Wire first speculated on way back in August of last year.

While losses are now both noticeable and relevant for both HELOCs and Alt-A mortgages, S&P’s data also shows potential trouble brewing in prime jumbos — the name given to securitized mortgages north of the traditional $417,000 conforming lending limit, and without the exotic features that define Alt-A mortgages.

S&P said that total delinquencies for prime jumbos originated in 2006 rose 15.4 percent during March, while the 2007 vintage saw DQs ratchet upward by 15.5 percent — keep in mind, that’s on a monthly comparison basis, to boot. Serious delinquencies rose even higher, to 22.6 percent for the 2006 vintage and 18.8 percent for the 2007s.

While cumulative losses in prime jumbos haven’t yet reached levels that should immediately concern investors, the speed with which even prime jumbos are now headed into delinquency is a trend that every mortgage market participant should keep a close eye on.

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

National City Corp. (NCC: 6.05, -27.37%) unloaded a doozy on the mortgage market Monday morning — it a nutshell, Ohio’s biggest bank will turn to the capital markets to raise $7 billion in capital, reported it’s third straight quarterly loss, absorbed a charge of $1.4 billion for loan loss provisions, saw charge-offs nearly double, and slashed its dividend to $.01 per share.

The bank, hard hit during the mortgage crisis, saw its shares tumble nearly 30 percent by afternoon trading on the New York Stock Exchange to $5.97, as a result.

“Clearly, the U.S. housing and mortgage environment deteriorated significantly over the course of the first quarter. As a consequence, we have revised future loss expectations and significantly increased reserves across several portfolios, in particular the liquidating portfolios of nonprime mortgage and broker-sourced home equity loans,” National City CEO Peter Raskind said.

Capital anew
News of fresh capital makes National City the latest in a growing string of banks and financial institutions to recapitalize as the mortgage and credit mess has drained core capital and threatened risk-based capital levels, and gives a stake to private and institutional investors including Corsair Capital LCC at a 40 percent discount to Friday’s closing price.

The lender will raise $6.37 billion selling convertible securities, it said in a press statement, with each share convertible into 20,000 shares of the company’s common stock. The bank is also looking to raise $631 million via an offering of common stock.

National City also slashed its dividend to 1 cent a share from 21 cents, in a move to further preserve capital.

The moves to raise and preserve capital come too late for the first quarter; National City said it lost $171 million, $.27 per share, during Q1 versus a loss of $333 million during the most recent fourth quarter.

Bad mortgages bite the bottom line
To put just how bad mortgages really were for National City in the first quarter, it’s worth noting that mortgage banking contributed a full $.47 per share loss to the bank’s quarterly performance — nearly double the actual loss reported on a consolidated basis.

National City set aside $1.4 billion in the first quarter to cover expected losses on its loans, it said. The reserves would appear to be needed, too, given that nonperforming assets (loans more than 30 days past due, in most cases) jumped to an eye-popping $2.27 billion during the quarter — an increase of 49 percent within one quarter. NPAs are now nearly 2 percent of the bank’s loan portfolio, National City said.

It’s worth noting that at the end of the quarter, National City still held $18 billion in home equity lines of credit, and $28.7 billion worth of residential mortgages in portfolio — including $8.5 billion worth of home equity loans. Residential mortgages alone (including HELs) saw non-performing assets more than double within one quarter, reaching $901 million — a full 40 percent of all non-performing assets on the books at the lender.

REO at National City was up 85 percent year-over-year, the bank said, as new additions from the bank’s loan portfolio remained roughly constant at $250 million. The bank did sell $170 million in REO during the quarter — its highest such total in well over two years — but did so by absorbing $31 million in discounts relative to cost. The historic high in additional write-downs on REO beyond cost suggest that even aggressive discounting and a resulting bump in sales wasn’t enough to clear the bank’s latest influx of repossessed property.

Sources have suggested to HW recently that this sort of REO scenario is playing out at numerous other lenders and servicers nationwide — most notably, Countrywide Financial (CFC: 5.54, -2.46%) and Washington Mutual (WM: 11.45, -3.70%).

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

National City Corp. (NCC: 6.05, -27.37%) unloaded a doozy on the mortgage market Monday morning — it a nutshell, Ohio’s biggest bank will turn to the capital markets to raise $7 billion in capital, reported it’s third straight quarterly loss, absorbed a charge of $1.4 billion for loan loss provisions, saw charge-offs nearly double, and slashed its dividend to $.01 per share.

The bank, hard hit during the mortgage crisis, saw its shares tumble nearly 30 percent by afternoon trading on the New York Stock Exchange to $5.97, as a result.

“Clearly, the U.S. housing and mortgage environment deteriorated significantly over the course of the first quarter. As a consequence, we have revised future loss expectations and significantly increased reserves across several portfolios, in particular the liquidating portfolios of nonprime mortgage and broker-sourced home equity loans,” National City CEO Peter Raskind said.

Capital anew
News of fresh capital makes National City the latest in a growing string of banks and financial institutions to recapitalize as the mortgage and credit mess has drained core capital and threatened risk-based capital levels, and gives a stake to private and institutional investors including Corsair Capital LCC at a 40 percent discount to Friday’s closing price.

The lender will raise $6.37 billion selling convertible securities, it said in a press statement, with each share convertible into 20,000 shares of the company’s common stock. The bank is also looking to raise $631 million via an offering of common stock.

National City also slashed its dividend to 1 cent a share from 21 cents, in a move to further preserve capital.

The moves to raise and preserve capital come too late for the first quarter; National City said it lost $171 million, $.27 per share, during Q1 versus a loss of $333 million during the most recent fourth quarter.

Bad mortgages bite the bottom line
To put just how bad mortgages really were for National City in the first quarter, it’s worth noting that mortgage banking contributed a full $.47 per share loss to the bank’s quarterly performance — nearly double the actual loss reported on a consolidated basis.

National City set aside $1.4 billion in the first quarter to cover expected losses on its loans, it said. The reserves would appear to be needed, too, given that nonperforming assets (loans more than 30 days past due, in most cases) jumped to an eye-popping $2.27 billion during the quarter — an increase of 49 percent within one quarter. NPAs are now nearly 2 percent of the bank’s loan portfolio, National City said.

It’s worth noting that at the end of the quarter, National City still held $18 billion in home equity lines of credit, and $28.7 billion worth of residential mortgages in portfolio — including $8.5 billion worth of home equity loans. Residential mortgages alone (including HELs) saw non-performing assets more than double within one quarter, reaching $901 million — a full 40 percent of all non-performing assets on the books at the lender.

REO at National City was up 85 percent year-over-year, the bank said, as new additions from the bank’s loan portfolio remained roughly constant at $250 million. The bank did sell $170 million in REO during the quarter — its highest such total in well over two years — but did so by absorbing $31 million in discounts relative to cost. The historic high in additional write-downs on REO beyond cost suggest that even aggressive discounting and a resulting bump in sales wasn’t enough to clear the bank’s latest influx of repossessed property.

Sources have suggested to HW recently that this sort of REO scenario is playing out at numerous other lenders and servicers nationwide — most notably, Countrywide Financial (CFC: 5.54, -2.46%) and Washington Mutual (WM: 11.45, -3.70%).

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

Bank of America Corp. (BAC: 37.61, -2.46%) said Monday that net income fell to $1.21 billion, $0.23/share, in the first quarter of 2008, compared to earnings of $5.26 billion, or $1.16/share, in the year ago period — numbers that were well below investor and analyst expectations. Shares of the North Carolina-based financial giant were off nearly 2 percent in early trading, as a result.

Driving the steep drop in income were continuing problems in mortgages, as well as increasing stress in more general consumer lending categories — not to mention emerging credit quality issues in key commercial lending sectors. In particular, large losses tied to residential home equity lending, and another $1.9 billion in write-downs spanning CDOs to leveraged loans, drove a significant increase in both charge-off activity as well as loss provisioning.

Home equity a problem
Consumer and small business lending, 77 percent of the bank’s revenue base during Q1, saw losses mount as more consumers found themselves unable to manage their outstanding debt, resulting in increased losses on mortgages, home equity lending, and credit cards.

BofA provisioned a whopping $6.5 billion for expected credit losses in its consumer-facing businesses, compared to $2.4 billion one year earlier — the vast majority of which was tied to credit cards. Nonetheless, $1.9 billion of that total was reserved in Q1 for expected losses tied to residential mortgages and home equity lending, the bank said, up dramatically from $687 million provisioned for expected losses just one quarter earlier.

Home equity lending proved especially problematic. BofA’s allowance for loan losses in home equity lending jumped from $963 million to $2.6 billion in one quarter, as net charge offs rose 177 percent to $496 million. More than $1.78 billion of home equity loans were nonperforming in Q1, compared to $1.3 billion in the fourth quarter of 2007.

Much of the home equity losses absorbed by Bank of America are stemming from problems in California and Florida, the bank said on a call with analysts and investors. 39 percent of the bank’s HE portfolio is in these two states, yet they represent they represent more than half of all charge-offs.

Residential mortgages saw their share of trouble during the quarter as well, with charge offs more than doubling, although the total was a smaller $66 million for the first quarter; BofA had recorded $27 million is such charge-off activity during the fourth quarter of last year.

Non-performing residential mortgages, however, grew surprisingly fast — reaching nearly $2.6 billion during Q1, up nearly 30 percent in one quarter. 10 percent of the mortgage portfolio includes borrowers now at 90 percent or greater loan-to-value, BofA said.

CEO Kenneth Lewis said that charge-offs will remain an issue going forward, likely signaling further earnings pressure in future quarters.

“Credit quality will continue to be an issue with charge-offs at least at first quarter levels but probably higher for the rest of the year,” he said.

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

Bank of America’s profit tanked a whopping 77% in the recently-closed quarter as the bank took on an additional $5 billion in credit-loss provisions. The company cited ongoing challenges to the consumer such as high debt, subprime mortgage-related issues and a faltering economy as reasons for concern for future quarters. Still the bank reaffirmed its plan to integrate Countrywide in to its operations in the 3rd quarter.

The bank reported that retail loan originations were up 23% on lower financing costs. It appears that it’s decision to focus 100% on retail after closing its wholesale branch paid off as the originations for the bank were the highest since 2003. It makes you wonder how long after integrating Countrywide will executives wait before they close Countrywide wholesale on a similar retail growth strategy? My guess is Q4 Countrywide wholesale is no longer.

From Market Watch on the Bank of America profit-loss:

Bank of America Corp.’s first-quarter profit fell 77% as credit-loss provisions jumped $4.78 billion, driven by weakness in home-equity loans as well as credit extended to small businesses and home builders, the company said Monday.

“We remain concerned about the health of the consumer given the prolonged housing slump, subprime issues, employment levels and higher fuel and food prices,” CEO Ken Lewis said in a press release Monday morning.

Still, there were some bright spots. The company said that lower financing costs in January increased direct-to-consumer mortgage originations 23%, the highest since 2003.

The bank also reiterated its commitment to buying struggling mortgage lender Countrywide Financial Corp. and said it still expects that deal to close in the third quarter.

UBS AG CEO Marcel Rohner told Swiss radio station DRS that the market for U.S. subprime RMBS is likely to stabilize before the end of this year, Bloomberg News reported on Monday. His remarks come as a trickle of subprime paper has begun trading again during the past few weeks, as HW covered recently — but activity so far has been just that: a trickle.

Rohner told DRS in an interview over the weekend that he sees the RMBS market stabilizing within the next three to six months, although consumer credit and commercial real estate will not be part of that stabilization. Many U.S. pundits have pegged weakness in commercial real estate as at the beginning of a slow cycle, with further softening in CRE expected throughout the duration of 2008 and into 2009.

Rohner’s remarks should not be confused with a call of a bottom in housing, however, as sources suggested to Housing Wire that subprime mortgage debt moving once again in the secondary markets — still far more a hope than anything resembling reality — won’t directly impact troubled homeowners here in the States.

“We’re talking about distressed assets here,” said one source, a hedge fund manager who asked not to be named. “The stuff that’s out there will start to trade, but nobody has an appetite for new product right now. We’re much more interested in buying up paper that we think has been devalued to the point of value.”

A look at the ABX indices, which track against subprime RMBS, would suggest that the market for subprime paper has yet to really unlock itself.

The ABX-HE-BBB- 07-02 series, which includes equity tranches of various subprime deals, closed Friday at $9.46, just $.03 above its all-time low; the ABX-HE-AAA 07-02 series, which tracks investment grade debt, closed up slightly at 57.23 and has been trading within a tight range for the past week, according to market data provided by MarkIt Group Limited.

Similar trajectories exist for other ABX rolls, suggesting that the market has not yet thawed itself out, as much as some market participants are beginning to toss around the idea of going long on subprime in the secondary market. That said, remarks by Rohner and other key industry executives suggest a more hopeful tone for the back half of this year.