BofA Repurchases $330M from Freddie; Delinquencies Down, Sales Prices Up – What’s Going On? AIG Back in Subprime

Here is an
interesting note for debt market students: Germany is scheduled today to sell
two-year bonds that won’t make set
interest payments
. The move reflects the safe harbor of German debt while
revealing trepidation about the euro zone. There is even talk of German bonds
with negative yields. “In these uncertain times, people are more concerned
about the return of capital rather than the return on capital,” said one
strategist at Lloyds Bank. (Our 2-yr. was auctioned off yesterday with a yield
of .3%.)


But others reach for yield. Any time someone sees a headline like, “AIG ventures back into subprime
mortgages” it can cause shudders. But yup, that’s the deal.

Expansion is the name of the game for many lenders. Majestic Home Loan is looking for Branch Managers, Area Managers, Retail
Loan Officers, DE Underwriters, Funders and wholesale AE’s in six markets: CA,
WA, GA, MD, NC and VA.  Majestic, founded in 1997, will also be hiring
a Branch Manager, Area Manager and Loan Officers for its Duluth, GA, office.
The company’s headquarters are in Rancho Cucamonga (Southern California), and resumes
should be sent to Roger Zelaya, Regional Vice President, at roger.zelaya@mhlmtg.com.

And talking about expansion, it appears ClearPoint
Funding (national wholesaler) is going through a national reorganization,
and there may be some good sales and operations talent available in many
markets across the country. If you are
looking to expand your footprint throughout the country, this may be a good
opportunity. If you are interested in finding out who may be available please
send an email to mortgageHR@hotmail .com.

In an interesting
move, in May Bank of America will repurchase $330 million of home loans from
Freddie Mac
“after flaws were found in how they were created.” In a story from
Bloomberg, the facts seem to be that the payments on the “vast majority” of the
loans are current but that BofA agreed to the refunds “because the valuation
method used at origination did not meet the investor’s technical requirements.”
Freddie Mac and Bank of America announced a $1.28 billion settlement in January
2011 over bad loans sold through 2008 by Countrywide. Bank of America’s backlog
of pending demands for refunds on soured loans reached a record $16.1 billion
in the first quarter as a dispute deepened between the bank and Fannie Mae.
Fannie stopped accepting new loans from Bank of America in January.

From an
investor’s viewpoint, this is an interesting development. Freddie provided a
list of pools for which the share of balance to be bought-out exceeded
5%.  These pools represent a total outstanding balance of $1.3 billion and
the net buyouts on these pools add up to $330 million. Further, the affected
pools were mostly issued in 2010 and 2011, the pools are originated entirely by
Bank of America, and the buyouts span 30-yr, 20-yr, 15-yr, as well as ARMs. Freddie
Mac had mentioned a change in its rep and warranty sampling methodology in
its latest Q1 filing, and Barclays
Capital
suspects these rep and warranty buyouts may be related to its new
sampling system. Barclays points out that the
buyout does raise some questions
. “1) If these are rep and warranty
repurchases on post HARP loans originated under a fairly tight underwriting
regime, then they will generate concerns around buyouts on newly originated
loans. This will especially true for higher SATO and HARP loans. 2) Though this
round appears to be entirely targeted at Bank of America issued pools, it is
unclear if other originators are being targeted. 3) It is also unclear if this
is a one time-issue or a process that will be revisited at some regular
interval. 4) Another concern would be whether similar buyouts are being
considered or being implemented at Fannie Mae.

Similar to my inability to keep track of all the housing price measures that
are out there, I can’t keep track of the various delinquency numbers that seem
to come out every week. But the recent numbers from the MBA caught my eye.
There were substantial improvements in
delinquency rates during the first quarter of 2012
according to the
National Delinquency Survey. Jay Brinkmann, MBA’s Chief Economist and SVP of
Research and Education said that the combined percentage of loans in
foreclosure or at least one payment past due was roughly 11%, a drop from last
quarter and from last year’s first quarter. In fact, this was the lowest that
this measure has been since 2008 – mostly due to a decrease in the rate of
loans that were 30 days or more delinquent. There was also a decrease in
seriously delinquent loans but it was not accompanied by an increase in
foreclosure starts which, in fact, decreased. Mr. Brinkmann suggested that looking
at the two figures together leads to the assumption that a lot of very
delinquent loans are being resolved in a manner other than foreclosure.

Mike
Fratantoni, MBA’s Vice President of Research and Economics said noted that the percentage of loans in foreclosure is
up for prime and FHA loans
, but the percentage of subprime loans in
foreclosure continues to fall as the subprime loans age and the problems loans
are resolved one way or the other. “The problem continues to be the
slow-moving judicial foreclosure systems in some of the largest states,”
Franantoni said.  While the rate of foreclosure starts is essentially the
same in judicial and non-judicial foreclosure states, the percent of loans in
the foreclosure process has reached another all-time high in the judicial
states, 6.9 percent.  In contrast that rate has fallen to 2.8 percent in
non-judicial state, the lowest since early 2009.” The difference in the
rates is even more disturbing in certain states.  In Florida the percent
of loans in foreclosure is now 14.31 percent. New Jersey and Illinois are
trailing Florida substantially but still have rates of 8.37 percent and
7.46 percent and, Brinkmann said, their rates are increasing.  Ten
judicial states have rates above the national average of 4.39 percent.  On
the other hand, among the 29 states using a non-judicial process, only Nevada
has a higher rate of loans in foreclosure (6.47 percent) than the national
average.

Five states now account for over 52.4
percent of all foreclosures
in the country while accounting for only 32.1
percent of the loans serviced. They are Florida, California, Illinois, New
York, and New Jersey.

Along
those lines, Realtors can tell you that over
the past few years short sales have risen significantly as a percentage of
total non-agency liquidations
. The benefits of pursuing a short sale are
compelling for servicers and investors, who are able to liquidate delinquent
loans in an expedited fashion with fewer P&I advances and are often able to
sell the property in a better condition at better prices, lowering severities. The benefits of a short sale are largest
for jumbo borrowers and smallest for subprime borrowers
; as a result, the
usage of short sales is also highest among jumbo borrowers. This is partly
because subprime servicers stop advances more and as a result the difference in
timelines matters less. Historically, judicial states used short sales more,
but that gap has narrowed recently as non-judicial state timelines have
extended, and short sales now represent half of the liquidations in
non-judicial states. Short sale usage among higher balance and owner-occupied
loans has also been higher historically to some extent. For example, because of
their long liquidation timelines, New York and New Jersey utilize short sales
much more frequently than other states; these two states also derive the most
benefit from using a short sale. On the other hand, liquidations in states such
as Texas and Nevada, which have relatively short timelines, are less likely to
involve short sales, per Barclays
Capital
.

Larger servicers have more frequently utilized short sales as a liquidation
strategy, potentially because their ongoing servicing costs tend to be higher
than for specialized servicers such as Ocwen and Nationstar. Another reason may
be the heightened scrutiny from the government and the media over their
foreclosure practices since the robo-signing scandal emerged. And looking at
investors, Barclays found that the benefits of a short sale, after adjusting
for compositional and timeline differences, are highest for Citigroup, JP
Morgan, and Indymac.

My bet is that NAR chief economist Lawrence Yun has been waiting for yesterday
for a long time. The National Association of Realtors announced that the median
price of an existing home climbed about 10% to $177,400 from $161,100 in April
2011, the strongest year-to-year gain since January 2006. The median price in
April reached its highest level since July 2010 when it was $182,100. And Existing
Home sales rose to 4.62 million at a seasonally adjusted annual rate in April
from a downwardly revised March rate of 4.47 million.

NAR chief
economist Lawrence Yun said, “It is no longer just the investors who are
taking advantage of high affordability conditions.  A return of normal
home buying for occupancy is helping home sales across all price points, and
now the recovery appears to be extending to home prices. The general downtrend
in both listed and shadow inventory has shifted from a buyers’ market to one
that is much more balanced, but in some areas it has become a seller’s market. This
is the first time we’ve had back-to-back price increases from a year earlier
since June and July of 2010 when the gains were less than one percent.”

Looking at
rates, Treasuries bounced off their lows in the last half hour before the close
as equities sold-off in a late day “risk-off” trade. The 2-yr auction went off
without too much fuss. Our MBS prices closed lower by about .125, but tighter
to Treasury yields, on volume that was slightly above the recent averages, and
the 10-yr. worsened by .5 in price settling at 1.79%.

On tap
today is a mugful of housing news: the MBA’s application index, New Home Sales,
and the FHFA Housing Price Index for March. We also have a $35 billion 5-yr
note auction.

An old man and woman were married for many years, even though they hated each
other. Whenever there was a confrontation, yelling could be heard deep into the
night. The old man would shout, “When I die, I will dig my way up and out
of the grave and come back and haunt you for the rest of your life!”
Neighbors feared him. They believed he practiced magic because of the many
strange occurrences that took place in their neighborhood. The old man liked
the fact that he was feared.  To everyone’s relief, he died of a heart
attack when he was 98.
His wife had a closed casket at the funeral. After the burial, she went
straight to the local bar and began to party as if there was no tomorrow. Her
neighbors, concerned for her safety, asked, “Aren’t you afraid that he may
indeed be able to dig his way out of the grave and haunt you for the rest
of your life?”
The wife put down her drink and said, “Let him dig.  I had him buried
upside down, and I know he won’t ask for directions.”

…(read more)

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