WASHINGTON – The U.S. Department of Housing and Urban Development (HUD) announced today that it is charging the owner of a 24-unit apartment building in Holyoke, Massachusetts, with housing discrimination for denying units to families that have children. HUD’s charge alleges that Nilma Fichera, who owns and manages New York-based N.A.G. Realty, LLC, violated the Fair Housing Act when she refused to show or rent apartments to families with children because she could not certify that the building was free of lead-based paint.

First Horizon’s Buybacks; Buyback Legal Chatter; Basel III and Construction Loans; Congress Snubs Small Business?

I have been subtly warning groups during speeches, and writing in this commentary, about the implications of Basel III. Most of the focus is on servicing & the value of it. But did you know that under the new Basel III rules, construction lending would likely go into the “high risk commercial real estate” category and require a 150% risk weighting? “Lenders would seek deals where a developer would contribute a substantial amount of cash equity; while banks would be less likely to let developers rely just on the equity from appraisals” per American Banker. And the government and the Fed are asking why banks aren’t lending? This is just another reason.

Last month we sold the house where my kids grew up, and I had a handyman remove the doorframe where we marked heights on birthdays. I am not mentioning this to turn the daily into a Hallmark card, but because it reminded me of one thing that the press seems to forget: a house is a home and not a share of stock. And when it comes to that, the popular press seems to forget that people need a place to live, that people want a good school district for their kids, a place to get to know the neighbors, a place to create an emotional attachment. I could go on and on, but there are very concrete reasons why people who are underwater on a house still make the payments, why many who supposedly saw the real estate decline didn’t sell their home, and why so many people don’t care about minute fluctuations in the price of housing based on the latest metric.

I’ll get off my soapbox, and get on with business: I think that the last time the S&P/Case-Shiller Home Price Index went up was during the Eisenhower Administration – until now. Seriously, for the first time in eight months the S&P/Case-Shiller Home Price Indices rose over levels of the previous month.  Data through April 2012 showed that on average home prices increased 1.3% during the month for both the 10- and 20-City Composites. Prices are still down 2.2% for the 10-City and 1.9% for the 20-City over figures for one year earlier but this is an improvement over the year-over-year losses of 2.9% 2.6% recorded in March. This report followed Monday’s news that New Home Sales jumped 7.6% in May to 369k and was up 19.8% from a year ago, and last week’s Existing Home Sales, Housing Starts and NAHB HMI which all contained some positive signs.

How’s this to grab one’s attention: “Congressional Subcommittee REFUSES Small Business Brokers and Appraisers a Seat at the Table.” The notice from the NAIHP goes on, “For the second time in a week, the Subcommittee on Insurance, Housing and Community Opportunity, Chaired by Rep. Judy Biggert (R-Illinois), refused small business housing professionals the right to be represented during Congressional testimony.” Here you go:

Yes, there are plenty of rumors that the agencies are hotly pursuing buybacks to recoup taxpayer losses, and that the agencies are losing personnel except for QA & auditing. But that reasoning doesn’t help companies like First Horizon National Corp. It “cited new information it recently received from Fannie Mae as the basis for incurring the $272 million charge this second quarter. About $250 million will go to repurchase loans made with “inadequate or incorrect” documentation, and $22 million is being charged to address pending litigation.” I don’t make this stuff up.

Last week I received a legal question about buybacks. “I was asked by a former customer of a major investor’s correspondent lending group about how others are handling repurchase/make-whole requests on older vintage loans.  His experience has been that the investor will ask to be reimbursed for losses associated with loans that have been foreclosed and disposed of without being given an opportunity to refute the alleged rep and warrant deficiency.  He has had to hire a law firm to argue each of these requests and the major investor has backed off each time. Normally, when a correspondent is still active, there is obviously leverage against the correspondent under an implied or actual threat of being terminated as a customer if a make-whole is not made, and when an investor is no longer in the correspondent business, I’ve heard rumors of it being more inclined to back down but sometimes taking a former customer to court or ‘saber rattling’. Needless to say, it is expensive to have a lawyer prepare a rebuttal to a make-whole request, just to have the investor ultimately back-off – what to do?”

I turned this over to attorney Brian Levy, who wrote, “Your question about investor willingness to sue originators over repurchase claims is difficult to answer with specificity.  My clients have been able to settle and/or avoid litigation in every engagement that I have undertaken in this area. That does not mean, however, that the threat of investor repurchase litigation over individual loans is not real or that litigation is not occurring, but it has been my experience that these disputes can be resolved (or dismissed) through extensive and detailed settlement negotiations and information exchange.  Litigation over individual repurchase claims may be fairly unusual now, but so were repurchase claims entirely prior to 2007-2008. Due to the unique nature of each originator’s position and the facts around applicable repurchase claim(s), however, it would be reckless to assume one will not be sued on specific claims based on what is generally occurring in the industry or based on what may have been past investor appetite for litigation (although these are important elements to consider in one’s strategy).”

Brian goes on. “For example, much depends on the facts and circumstances of the loan(s) in question, whether there are any other relationships between the parties that can be leveraged (loans in the pipeline, warehouse lines etc.) the overall quality, stability and reputation of the originator and, significantly, the parties’ tolerance for risk, availability or need for reserves and the desire for finality.  Moreover, investor and originator appetite for lawsuits may change over time as strategies can change in organizations and as the few cases that have been filed begin to yield decisions that are more or less favorable to one side or another. Even the tenor of discussions or lack of attention to the matter can impact a party’s willingness to file a lawsuit. All of these issues should be explored with legal counsel as part of an originator’s comprehensive repurchase management strategy.” (If you’d like to reach Brian Levy with Katten & Temple, LLP, write to him at

Here are some somewhat recent conference & investor updates, providing a flavor for the environment. They just don’t stop. As always, it is best to read the actual bulletin.

Down in California, it is time again for the CMBA’s Western Secondary conference. (I’ve been wandering around that San Francisco conference since 1986 – if those halls could talk…) The CMBA has presentations on “QM, QRM, the CFPB, Agency Direct Delivery – Reviving the Lost Art of Servicing Retained Execution, Compliance issues Facing State Licensed Mortgage Banks Today and How Regulatory Change will Impact Your Business and the Secondary Market, Manufacturing Quality – Steps to Produce a Quality Loan (Operation Focus),” and several other topics. Check it out.

In light of the increasing number of non-conforming transactions where the departure residence is retained by the borrower and is in a negative equity position, Wells Fargo issued a reminder that underwriters must weigh any and all risk factors evident in the loan file.  Each case should be weighed individually, as there are only so many situations underwriting guidelines can predict.  The Wells Seller Guide now states that, in a case where the departure residence won’t be sold at the time of closing and is in a negative equity position, paying down the lien or using additional reserves to cover the negative equity may be required to reduce overall risk.

Wells has issued another reminder that a signed Borrower Appraisal Acknowledgement is required for all loans.  The Acknowledgment, whether it’s the Wells-issued form or a custom document, must include the property address, complete lender name, borrower name, borrower signature, and borrower signature date.  If the form has checkboxes where the borrower can make a choice, these boxes must be ticked.

Due to changes to FHA Single Family Annual Mortgage Insurance and Up-Front Mortgage Insurance Premiums announced by HUD back in March, one of which requires lenders to determine the endorsement/insured date of the FHA loan as part of a Streamline Refinance transaction, Refinance Authorization results will need to be submitted to Wells with the closed loan package.  These results are necessary to ensure that the accurate MIP was applied.  This applies to all FHA Streamline Refinances with case numbers assigned on or after June 11, 2012, while loans purchased through Pass-Thru Express are excepted.

Wells’ government pricing adjusters are set to change on July 2nd.  For VA loans with scores between 620 and 639, the adjuster will go from -0.750 to -1.500.  The adjuster for loans with scores between 640 and 679, currently at -0.250, will change to -0.500.  This affects Best Effort registrations, Best Effort locks, Mandatory Commitments, Assignments of Trade, and Loan Specified Bulk Commitments.

How sensitive are our markets to European news? Sure, instead of buying our 10-yr yielding 1.65% you could buy a Spanish 10-yr yielding 6.74%. But there is instability, evidenced by this note from an MBS trader yesterday: “News of Merkel stating Europe would not have shared liability for debt ‘as long as she lives’ caused Treasuries to immediately surge higher, only to be met by better real money selling of 7s.  While the selling did help to stall the rally, the true relief didn’t come until Reuters posted a correction to its initial release, re-quoting Merkel as having said Europe would not have ‘total shared’ liability for debt as long as she lives.  The amendment took Treasuries off the highs ahead of the 2yr auction…”

Say all you want about the market, bond prices and yields are not doing a whole heckuva lot. Tuesday the 10-yr closed at 1.63%, very close to where it’s been all week, although there was some intra-day volatility blamed on Europe. (European problems will be with us for years, and paying attention to intra-day swings can become wearisome after years…) For agency mortgage-backed securities, volume has been around “average” all week, with the usual buyers (the Fed, hedge funds, money managers, overseas parties) absorbing it. Up one day, down another – yesterday was down/worse by about .250, which was about the same as the 10-yr T-note. We could have been helped by the Conference Board’s Consumer Confidence index which dropped for a fourth straight month, to 62 from a revised 64.4 in the prior month, but nope.

No one is getting any younger… (Part 1 of 2)
I very quietly confided to my best friend that I was having an affair. She turned to me and asked, “Are you having it catered?” And that, my friend, is the definition of ‘OLD’!

Just before the funeral services, the undertaker came up to the very elderly widow and asked, “How old was your husband?”
“98,” she replied. “Two years older than me.”
“So you’re 96,” the undertaker commented.
She responded, “Hardly worth going home, is it?”

Reporters interviewing a 104-year-old woman:
“And what do you think is the best thing about being 104?” the reporter asked.
She simply replied, “No peer pressure.”

I feel like my body has gotten totally out of shape, so I got my doctor’s permission to join a fitness club and start exercising.  I decided to take an aerobics class for seniors. I bent, twisted, gyrated, jumped up and down, and perspired for an hour. But, by the time I got my leotards on, the class was over.

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Potential Broad-Based Refi Plan Aims To Level Playing Field; Increase Home Prices

This is the second of two parts (Part 1: Prelude to HARP 3.0 as Donovan Testifies at Senate Hearing) of a summary of a hearing of the Senate Banking Committee held Tuesday during which Secretary of Housing and Urban Development (HUD) Shawn Donovan spoke on a range of housing issues but particularly on efforts to streamline and remove barriers to refinancing.  In addition to addressing the issue of “fundamental fairness” for borrowers, the plan also seeks to level the playing field among servicers and originators, as well as stimulate home-price appreciation, among other things.

Jeff Merkely (D-OR) asked Donovan what it would take, a regulatory or statutory fix, to address the limit on FHA loans to a 115 percent loan-to-value (LTV) ratio.  Donovan said it was actually an even lower ratio in practice but the proposal is for a broad-based refi to allow up to 140 percent with the clear view that any loan deeply underwater would have to be written down to those parameters.  That, he said, along with creating a separate fund from the FHA MMI insurance fund to protect that fund would be the key legislative changes required.

Merkley asked if an insurance fee for borrowers who are refinancing would be the strategy for financing the separate fund and Donovan said another suggestion is a broad-based financial sector fee of some sort but he was also looking at a risk transfer fee as a voluntary opt-in for companies that hold these underwater mortgages.  “And in laying this out over — over 40 years, if you have basically a spread, because of the federal government guarantee funds between a 2 percent and, say, a 5 percent mortgage, and you throw in the risk transfer fee, you end up with solvency under kind of reasonably conservative assumptions. But it’s not zero risk because dramatic things can happen. And that’s where the federal government guarantee through FHA becomes essential, or an extension of the federal government guarantee to utilize for the Federal Home Loan Bank system.”

Donovan said there is no question that by refinancing loans into FHA loans the government would be taking on some additional risk but the question is how to minimize that risk and by both focusing on current loans that meet additional underwriting criteria, lowering the cost of these already safe loans and being able to fully pay for it, they are hoping to offset any expected losses.

Most importantly, he said, there is enormous up-side potential.  “If we can just move house prices a few percentage points through this broad-based refinancing, the benefits to the taxpayers through improvements in the performance of Fannie Mae and Freddie Mac, FHA, and the broader lift that the economy would have are all potentially enormous.”

Donovan said there are two major changes to FHA enforcement powers they have been seeking.  One is the ability to hold lenders accountable through indemnification but there are some loans and lenders for which there is no clear authority to enforce standards.  The second is a somewhat perverse provision that allows FHA to go after lenders only for regional or local violations based on their track records compared to other lenders in that area.  That it is not possible to disqualify an entire company nationally through current standards makes no sense. 

Donovan said that there is a real urgency to get the refinancing programs on the right track because interest rates today are at the lowest level they’ve ever been for a 30-year mortgage. Low interest rates are typically one of the most beneficial things to boost the economy and the nation isn’t seeing the full benefit of record low rates that it should be seeing.  “And the quickest, most effective, and I think the most bipartisan way that we can increase the boost to the economy of these record low interest rates is to quickly get these — these proposals enacted and — and that’s something that I think hopefully we can all agree on and move with real speed in getting these done. But as the economy continues to improve, I think all expectations are that this window of record-low interest rates may not last a significant period of time. And therefore, it is particularly urgent that we take advantage of this.”

Shelby returned to the issue of second mortgages and the impact of first lien modifications on those junior liens and vice versa.  Donovan said that while they have been able to insert some requirements for dealing with junior liens into HAMP guidelines and into the settlement agreement the lack of general rules for dealing with lien priority has been a problem.  There are no rules, he said, except when you get to a foreclosure.  No rules for what happens in a modification, especially if the second lien is current.  The department has tried to get around this by putting rules in place, but it would be better to do that within the context of a universal refinancing proposal.

In answer to another question by Shelby as to the number of additional homeowners, above those participating in HARP 2.0, might be helped by the Menendez-Boxer legislation Donovan said he would have to answer as a range with Christopher Mayer estimate of 12 million at the high end.  He said his department’s expectations are significantly lower than that but not as low as the one million projected by some. 

Even with all the benefits that would accrue to them, there are two things that are stopping some borrowers from refinancing.  Some simply cannot do it – they may be above water on their first lien but have a second lien that make refinancing impossible.  The second barrier is high costs – they need an appraisal or there is a monopoly in effect where their current servicer can charge them high fees, in one estimate as much as $15,000, because of the lack of competition between servicers.

Merkley underlined the urgency of taking advantage of low interest rates, recounting a program he had been involved in which was effectively killed because of rapidly escalating home prices but said to him a more critical issue is how to help homeowners who do not have GSE guaranteed loans.  When he talks to constituents about their loans they generally do not know who holds it.   Then he looks and finds that some are not GSE-backed and he has no help to offer them. It seems like a lottery, he said, when a family who is doing the right things can’t get help simply because their loan isn’t the right type.  Donovan said it was correct that this is about fundamental fairness and that is one of the important issues here. 

Merkley said his staff had looked at whether a fund could remain solvent and what the risks factors are and they think that the risk factors are greatest during the first few years after refinancing when a loan is still substantially underwater and the family either defaults strategically or runs into financial problems.  The federal guarantee has been extended and it is the government that is picking up the losses.  Maybe it is offsetting them through a risk transfer fee, insurance, or some other mechanism, but the assumptions about how to do that are critical.  Then there is the question about restrictions on a homeowner in the first few years.  Do you put place a rule as part of the mortgage that says you cannot walk away from this, Merkley asked, make it a legal requirement?  The issue of recourse is usually determined on the state level, but has there been a discussion about rules related to recourse or whether we should have a federal overlay on this?

Merkley asked about the prospects for addressing increased risk factors inherent in the first few years after refinancing when a loan is underwater and the family defaults.  Donovan effectively said that this was not the topic at hand, and that the issues mentioned by Merkley arise when a family is delinquent or where there is significant principal reduction happening.  Rather, what is being discussed here are borrowers who are current, “so, we didn’t see a need to go beyond that, given that these families are responsible, have been doing the right things and paying, and are not getting substantial principal reduction, at least below the 140 LTV, to — to be able to stay”.

It is appropriate in those cases to give them an incentive to be responsible in reducing their principal balance.  That is why there are incentives for them to use their savings to shorten their term rather than lower their payments and thus build equity faster.  “They’re really giving themselves a light at the end of the tunnel that makes it less likely that they’ll default in future years. And so that’s something I think you’re exactly right in your legislation to encourage.”

On the investor side, Donovan said, there is some concern whether loans are going to be in place for a significant period of time.  Investors have been generally supportive of HARP and other efforts but what they are concerned about is whether we will see a continuous cycle of refinancing.  “So what we have been clear on is that once you refinance to this record low level, you’re not going to see a refinance in that loan quickly.  And that’s a protection for investors that we do think is important in HARP and that we certainly have been open to doing in this broad-based refinancing.”  In other words, expect any changes to eligibility dates to be hard-fought. 

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MBA’s Stevens Suggests Single TBA Market

Mortgage Bankers Association (MBA) President and CEO David H. Stevens, speaking at the Association’s 2012 National Secondary Market Conference & Expo, pointed to the year just past and told his audience that things are looking better.  Both new and existing home inventories are down, sales are picking up, and shadow inventories are decreasing he said, and the economy is starting to see slow signs of recovery.  However, he said that the level of uncertainty the industry faces could have severe unintended consequences for consumers.

Stevens said, “It comes down to this, uncertainty and over correcting the mistakes of the past are the two greatest impediments to real estate market recovery and economic stability.”

A major issue, he said, is the lack of private investment; the government sector is at capacity, representing more than 90% of the market.  We can’t wait for Congress and the Administration to take action, to promote liquidity for investor purchases of mortgage-backed securities, especially in an election year.  There are things that can and should be done now that do not require legislative action.  Among these, he suggested, is to transition the GSEs to a fungible, pooled TBA eligible securities market.  In order to accomplish this, changes would need to be made with the Freddie Mac PC. With today’s trading disparities between Freddie and Fannie’s securities, the direct cost to competitively trade Freddie securities is by default being borne by taxpayers. Doing this now, while interest rates are low is of critical importance.

If the industry embraces a fungible MBS market, everyone involved will benefit. There will be more liquidity because the combination of Freddie Mac and Fannie Mae currency brings greater volume in any coupon. We all know that large, liquid pools create better trading value.  Taxpayers will be saved hundreds of millions of dollars because the execution will no longer be subsidized.  This is a necessary step to prepare the industry for the inevitable rise in interest rates.  Quite frankly, it doesn’t just save money – it helps to transition the market to a new paradigm by providing a more flexible and efficient way of trading securities.

Stevens also pointed to the problem of uncertainty in the market which is reflected by borrowers who can’t or won’t buy a home because they are unsure about their jobs, afraid of buying when prices aren’t stable or afraid they won’t qualify for a loan.  Lenders are fearful of lending because they don’t know how the rules might charge or if they might have to repurchase a loan because of a minor defect, and investors are skittish because they are worried about the collateral, don’t know which way the market is headed, or what new policy may affect them.

The mortgage industry is grappling with an overwhelming number of government rules and while legislators and regulators have successfully eliminated the most risky features and products that created the housing bubble, “we are quickly approaching the tipping point where overcorrection is going to limit access and shut out the very people everyone is trying to protect.”  

Lenders are afraid to make any loan on the margin so the only loans that will be made are to the wealthy, it will be too risky to take a chance on a first-time homebuyer who doesn’t have a large down payment or spotless credit.  This restrictive lending will prevent a recovery.

Limiting access to credit has resulted in two phenomena.  First, investors and speculators are driving the low end market with all cash deals because FHA has become harder to get for the marginal buyer and second, the middle class’s access to the market is shrinking

We cannot rely upon legislative corrections to fix these problems, he said.  Congress is at a stalemate; the Senate and House cannot agree and consensus is not guaranteed after the elections.  We do implore them not to raid the real estate finance piggy bank again as they did when the raised the GSE’s guarantee fees to pay for the payroll tax cuts.  “This is a painful example of Congress not considering the consequences for homeowners and potential home buyers.  Congress actually taxed the very consumer they had intended to help.” 

There are four key areas of uncertainty which are hold back credit, the Qualified Mortgage Rule (QRM), national servicing standards, repurchase demands, and ratings agency standards.  Clear rules in these key areas would provide a much needed level of certainty and allow the markets to continue to move in the right direction. 

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Chase, Wells Fargo Report Solid Profits, Credit Improvements in Mortgage Portfolios

Two of the nation’s largest banks came in with first quarter earnings above estimates today, due in part to improvements in their respective mortgage portfolios.  Wells Fargo reported record quarterly net income of $4.2 billion on revenue of $21.6 billion and JPMorgan Chase had net income of $5.4 billion on revenue of $27.4 billion. 

Wells Fargo’s revenue was up $1 billion from the fourth quarter of 2011, due the bank said to growth in noninterest income which was also up $1 billion to 10.7 billion driven by increases of $506 million in mortgage banking, $458 million in market sensitive revenue, and $181 million in trust and investment fees.

Mortgage banking noninterest income was $2.9 billion in revenue based on $129 billion of originations compared to $120 billion in the fourth quarter.  The company provided $430 million for mortgage loan repurchase losses compared with $404 million in the fourth quarter.  Net mortgage servicing rights (MSR) resulted in losses of $58 million compared to a $201 million gain in the previous quarter due to a reduction in the value of the MSRs from incorporating a higher discount rate.  The ratio of MSRs to related loans serviced for others was 77 basis points and the average note rate on the servicing portfolio was 5.05 percent.  The unclosed pipeline at the end of the quarter was $79 billion compared to $72 billion at the end of the fourth quarter.

The company had net charge offs during the quarter of $791 million in first mortgage loans and $763 million in junior mortgage liens, 1.39 percent and 3.62 percent of average loans respectively.  In the fourth quarter net charge offs for senior liens were $844 million (1.46 percent) and junior liens were $800 million (3.64 percent.)  Total non-performing assets at the end of the quarter totaled $26.6 billion, up from $26.0 billion and nonaccrual loans increased to $22.0 billion from $21.3 billion “with the increase exclusively tied to industry-wide supervisory guidance pertaining to the junior lien portfolio” in which 1.7 billion of performing junior liens with associated delinquent first liens were reclassified to nonaccrual status in the first quarter.  The bank said this had minimal financial impact as the expected loss content of these loans was already considered in the loan loss allowance.

Wells Fargo’s earnings equaled $0.75 per common share, up 11 percent from the prior quarter.  Bloomberg reported that analysts had expected earnings of $0.73 cents.  The bank also announced it would be increasing its quarterly common stock dividend to $0.22 per share effective with the first quarter.   

Chase’s first quarter net income of $5.38 billion was down from the record $5.56 billion it earned a year earlier.  Income per share however was up to $1.31 per share from $1.28 a year earlier when there were more shares outstanding.  According to Bloomberg, analysts were expecting earnings of $1.17 per share.

Chase reported that its first quarter results included $1.8 billion in pretax benefits from reduced loan loss reserves related to mortgages and credit cards.  The company also reported $1.1 billion pretax benefit from the Washington Mutual bankruptcy settlement and $2.5 billion in pretax expenses for additional litigation reserves primarily related to mortgage-related matters.

Chase’s real estate portfolio generated net income of $518 million compared to a net loss of $162 million a year earlier, primarily from improving credit trends reflected in the provision for credit losses.  Net revenue was 1.1 billion, down 7 percent from the previous year because of a decline in net interest income from lower loan balances due to portfolio runoff.

The provision for credit losses reflected a benefit of $192 million compared to 2.2 billion a year earlier reflecting lower charge-offs and a $1 billion reduction in loan loss allowances as delinquency trends improved. 

Home equity net charge-offs were $542 million (2.85 percent net charge-off rate) compared with $720 million (3.36 net charge-off rate) in Q1 2011.  Subprime mortgage net charge-offs were down to $130 million (5.51 percent) from $186 million (6.8 percent); prime mortgage charge-offs including option ARMS were $131 million (1.21 percent) compared with $151 million (1.32 percent). 

Nonaccrual loans totaled $7.0 billion, unchanged from a year earlier and up from $5.9 billion in the fourth quarter due to the reporting of $1.6 billion in performing junior liens as non-accruing under the same supervisory guidance that impacted Wells Fargo.

There was net income of $461 million from mortgage production and servicing compared to a net loss of $1.1 billion a year earlier.  Mortgage production generated $1.6 billion in revenue, an 80 percent increase from the prior year, partly from the impact of the Home Affordable Refinance Programs (HARP).  Production expenses increased $149 million to $573 million reflecting higher volumes and a “strategic shift” to the Retail channel including branches where origination costs and margins are traditionally higher.    Repurchase losses were down from $420 million to $302 million. 

Mortgage servicing related revenue was $1.2 billion, down 5 percent from the previous year because of fewer third party loans serviced and expense declined by $175 million to $1.2 billion.  Servicing had a pretax loss of $160 million compared to a loss of $1.9 billion a year earlier.

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