THE BASIS POINT

FDIC On Foreclosure Process, FHA Foreclosures, Freddie Profit?!

Some look forward to Sports Illustrated’s Swimsuit Edition or Time’s Man of the Year. I don’t think that the FDIC’s Supervisory Insights: Foreclosure Edition will garner the same attention, but it is useful to banks who service loans nonetheless because it outlines the FDIC’s position on foreclosure practices.

This FHA foreclosed inventory report from HUD is not good news, but it is not unexpected for people following shadow inventory. FHA foreclosed inventory was at 68,801 at the end of February, up 54.2% from February 2010.

Freddie Mac’s employees may want a Cinco De Mayo margarita tonight after reporting a $676 million quarterly profit, and indicated it would not seek additional funds from the US Treasury this quarter for the first time since it was taken over by the government nearly three years ago. But Freddie said that over the long term it was unlikely to earn more than the dividends owed to the Treasury on preferred stock issued as part of its bail-out and therefore expected to request additional funds in future periods. The CEO said, “Continued improvements on the employment front and in early-stage delinquencies were positive signs during the quarter, but we believe large inventories of unsold homes and a high number of distressed sales will continue to put downward pressure on home prices in many neighborhoods.” (Does he mean Nevada down 59%, Arizona down 50% and Florida down 49% from 2006 highs?)

Importantly for the industry, Freddie Mac also said that its requests to banks to repurchase faulty loans declined to $3.4 billion at the end of the first quarter, compared with $3.8bn at the end of the fourth quarter of 2010. More than 40% of loans owned by Freddie Mac were originated after 2009 and those loans have far higher equity and lower delinquency rates than those issued in 2006 and 2007.

[Reader submitted correction: “Thanks for earnings update. One small correction, which is that this is actually the fourth time since the government took Freddie over that it reported quarterly earnings and did not ask for a Treasury draw (not the first as you reported). Freddie’s earnings are up, delinquencies down, and even its REO inventory dropped 10% in the last quarter – good things.”]

Some acquisitions tend to work out better than others. (Wells & Wachovia seems to be working out.) On the other hand…Moody’s downgraded Bank of America’s mortgage servicing ratings because its loss prevention results have deteriorated. The agency lowered the ratings to “above average” from “strong.” BofA recently set aside $1 billion to repurchase mortgages and added $352 million to its legal expenses during the period. The company is fighting lawsuits from investors and insurers that claim they were tricked into buying mortgages based on fraudulent documents during the housing boom, the attorneys general from all 50 states are investigating allegations that BofA, and many other banks, submitted erroneous foreclosure documents, and the SEC is conducting a separate probe into misleading mortgage-backed investments.

We also have Deutsche Bank AG, who recently reported good earnings, being sued by the U.S. attorney’s office for allegedly lying over mortgages. Deutsche Bank bought MortgageIT in 2006, and both, according to the suit, heedlessly chose mortgages that dishonored the FHA’s mortgage insurance program rules. Quality checks and the ability of borrowers to make mortgage repayments were ignored before making the selection. Deutsche later resold those government insured mortgages and made significant gains. MortgageIT endorsed over 39,000 mortgages between 1999 and 2009 with a total underlying principal balance of more than $5 billion for the FHA insurance. Over $386 million have been paid in F.H.A. insurance claims and several more millions of dollars are expected to be paid for MortgageIT home loan defaults in the days ahead.