February 19,  2009 – The Troubled Asset Relief Program, or TARP disbursed $294 billion to 317 financial institutions by January 23rd, yet it still isn't clear whether the lenders are using the money to do more lending or, indeed, what they are doing with it, according to a report by the Government Accountability Office (GAO).

The GAO recommended broadening the scope of monthly TARP surveys to “further improve the integrity, transparency, and accountability of the program and more clearly articulate and communicate a strategic vision.”

The Treasury Department released a Feb. 4 statement indicating that senior executives at institutions receiving exceptional financial recovery assistance will be limited to $500,000 in annual compensation. The executives, however, can receive restricted stock that vests when principal and interest on government debt has been fully repaid.

The number of executives subject to clawback provisions has been increased to 25 from five, while shareholders must approve senior executive compensation. In addition, a ban on golden parachute payments will be extended to the top 10 executives from the top five banks, and the next 25 executives will be limited to golden parachute payments of one year's salary.

In testimony before the House Committee on Financial Services earlier this month, American Bankers Association President and Chief Executive Officer Edward L. Yingling called on the Treasury to fulfill the TARP commitment to community banks.

He endorsed TARP's specific citation of S-corporations — which have disproportionately been impacted by the current economic crisis even though their role was limited. He noted that the Treasury began allowing S-corporations to issue subordinated debt for TARP investments — extending TARP's reach by 2,500 institutions.

Yingling also called for an end to the disparity between TARP terms for S-corporations that are stand-alone banks versus those for other institutions. He specifically recommended provisions that would enable wider participation by the nation's mutual banks.

At the same hearing, Federal Deposit Insurance Corporation Deputy Chairman and Chief Operating Officer John F. Bovenzi supported equal TARP access for community banks — institutions with less than $1 billion in assets. So far, Bovenzi noted, 1,600 community financial institutions have applied to the program.

“The goal of providing government support is to ensure that such cut-backs and adjustments are made mostly in areas such as dividend policy and management compensation, rather than in the volume of prudent bank lending,” Bovenzi, who is also the acting CEO of IndyMac Federal Bank said.

But mortgage bankers want to see TARP funds redirected as originally proposed – buying non-performing assets off bank balance sheets.

“Above all else, we believe it is important to return TARP to its original purpose, which was to purchase non-performing assets off banks' balance sheets,” Mortgage Bankers Association President and CEO John A. Courson testified.

A $372 million TARP dividend was declared and paid by Wells Fargo last month, the San Francisco firm announced. Wells said it has originated or commited to almost $500 billion in loans since credit began contracting 18 months ago.

Bank of America announced that it paid a $402 million dividend to the U.S. Treasury on its $45 billion in outstanding government investments. Government investments included $15 billion in TARP funds, $10 billion as part of its agreement to acquire Merrill Lynch & Co. Inc. and $20 billion that was provided by the government to help facilitate the acquisition of Merrill.

B-of-A claimed $115 billion in new credit extended during the fourth quarter.

In an interview with CNBC earlier this month, B-of-A CEO Ken Lewis said he hoped to payoff TARP investments within three years. He indicated that the Charlotte, N.C.-based institution doesn't expect to seek any further TARP investments.

CitiGroup reported this month that it had deployed $45 billion in TARP capital so far, including $26 billion in residential originations, $6 billion in credit card lending and $3 billion in personal and business loans.

“We have already approved $36.5 billion in initiatives backed by TARP capital that are consistent with the objectives and spirit of the Treasury program,” Citi CEO Vikram Pandit said in the statement. “And, as part of our ongoing business, Citi continues to lend to consumers and businesses in the United States, where we extended approximately $75 billion in new loans during the fourth quarter.”

More than $300 million in TARP investments in Sterling Financial Corp. will be utilized for new and enhanced lending initiatives, a press release last week said. Sterling said residential lending subsidiary Golf Savings Bank was allocated $25 million, while commercial bank subsidiary Sterling Savings Bank was allocated $208 million to increase “lending activity to creditworthy borrowers.” The rest of the capital was retained by Sterling.

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January 30, 2009 – Flagstar Bancorp reported today that loan volume was higher in 2008 than 2007 but earnings for the fourth quarter were down significantly.  Residential loan production last year was $28.0 billion, nine percent higher than $25.7 billion reported for 2007.  Yet in the fourth quarter, Flagstar funded only $5.4 billion, down from $6.7 billion in the third quarter and $6.5 billion  in 2007.

The portfolio of mortgages serviced for others ended last year at $55.9 billion, increasing from $51.8 billion on Sept. 30 and $32.5 billion on Dec. 31, 2007. Flagstar said it earns 33 basis points for its servicing fee.

Flagstar had a $257 million loss for 2008 up from a $39 million loss for 2007. Fourth-quarter losses were $200 million, worsening from a $62 million third-quarter loss and a $30 million loss in 2007.

Flagstar disclosed that it will receive $267 million in TARP money and $250 million from MP Thrift Investments L.P., which has committed to another $100 million in equity investments during the first quarter.

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January 16, 2009 — Having sold most of its mortgage operation last year to MetLife, First Horizon National Corp's residential originations dropped 97 percent in the fourth quarter of 2008, the company reported today. Last year, Memphis-based First Horizon funded $17.5 billion in residential mortgages, according to the company's earnings report released today, down from $27.4 billion in 2007.

MetLife Bank, N.A. bought 250 First Horizon mortgage production offices outside Tennessee on Aug. 31. An origination platform, servicing platform and $19 billion first-lien servicing portfolio were also included in that sale.

With no new loans coming from outside Tennessee, loan production during the fourth quarter was less than $0.1 billion, falling from $3.1 billion in the third quarter and $6.3 billion a year earlier.

First Horizon's servicing portfolio ended December at around 351,000 loans for $63.7 billion, dropping from less than 451,000 loans for $65.3 billion at the end the previous quarter and roughly 632,000 loans for $103.7 billion at the end of 2007.

First Horizon had a full-year loss of $192 million across the company.

Earnings during the latest period were a $56 million loss, retreating from a $125 million third-quarter loss and a $249 million loss in the fourth-quarter 2008.

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Federal banking regulators said last week in a new report that nearly one-third of outstanding mortgages were approved with less than full documentation. Around one-fifth had credit scores below 660, and more than 90 percent were serviced by a third party. The findings came from the Comptroller of the Currency and Office of Thrift Supervision, which jointly surveyed the 14 largest mortgage servicers.

Banks surveyed were Bank of America, Citibank, First Horizon, HSBC, JPMorgan Chase, National City, U.S. Bank, Wachovia and Wells Fargo. Thrifts surveyed were Countrywide, IndyMac, Merrill Lynch, Wachovia FSB and Washington Mutual. All of these thrifts have either failed or been acquired since last summer.

The respondents serviced 34,877,891 mortgages for $6.1 trillion as of Sept. 30, 2008. Their combined portfolios accounted for around 90 percent of first mortgages serviced by banks and thrifts and more than 60 percent of all U.S. mortgages.

The servicers owned less than 10 percent of the loans they serviced, based on the number of loans outstanding. Those loans were owned by third parties through residential mortgage-backed securitizations and loan sales. The share of loans serviced for Fannie Mae and Freddie Mac was 62 percent.

Around nine percent of the loans serviced by the surveyed institutions were subprime. Borrowers with credit scores below 620 were considered subprime.

Alt-A loans amounted to 10 percent, the report said. Alt-A included borrowers with scores between 620 and 659. Low- and no-documentation loans made up 30 percent of loans serviced by the institutions.

Jumbo mortgages amounted to seven percent.

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Several mortgage restructuring programs are beginning to emerge in the wake of the new Obama Administration housing initiative.  Fannie Mae says it is working closely with the Neighborhood Assistance Corporation of America to establish a pilot mortgage restructuring program for distressed borrowers, according to the now-nationalized bundler of residential mortgages. The program involves restructuring mortgages to achieve an affordable payment. Neighborhood Assistance says it is a non-profit, community advocacy and homeownership organization.

About 478,000 Wachovia, including those with pick-a-pay loans, will be eligible for a streamlined modification program launched this week by Wells Fargo Home Mortgage, Wachovia's acquirer. Eligible borrowers primarily include those who are delinquent or are likely to become delinquent. The possible modifications include extended terms, interest-rate reductions and temporary interest abatements.

Fifth Third Bancorp., which reported a $2.1 billion fourth-quarter loss, said in its earnings report that it had modified $218 million in loans during the period. Restructured loans stood at $574 million on Dec. 31.

Fitch Ratings recently released a report indicating proposed bankruptcy cramdown legislation would probably not trigger immediate downgrades to residential mortgage-backed securities if it were passed. But Fitch noted the devil is in the details and it will issue a more conclusive statement once the final terms are hashed out.

Nearly one-third of Fitch-rated prime and Alt-A RMBS — where bankruptcy losses are not allocated as typical credit losses and cramdown risks are amplified — are more likely to face senior bond downgrades. Those deals, which have balances totaling $223 billion, are subject to carve-out provisions. Risk is more limited on over two-thirds of prime and Alt-A securitizations.

Several mortgage-related trade groups — including the American Bankers Association, the Consumer Mortgage Coalition and the Mortgage Bankers Association — sent a joint letter last week to U.S. House Representatives John Conyers and Lamar Smith opposing bankruptcy cramdown legislation. They cited H.R. 200 and H.R. 225, which would benefit mortgage fraud participants.

“The housing market is already contracting and enactment of cramdown legislation would make things even worse by injecting more risk into the mortgage market, making it harder and more costly for people to buy and sell homes,” the letter said. “Permitting cram down in bankruptcy would encourage many people to file for bankruptcy first and would undermine other efforts to work-out or modify troubled loans.

Meanwhile, the so-called MFI-Mod Squad was launched last week to expose illegal loan-modification firms and their operators, a statement last week said. Delinquent borrowers can find comments about scam companies on MFI's Web site, while they can also obtain help investigating unscrupulous loan modification companies.

An alliance was announced this week between MFI parent MFI-Miami and the modification firm Loan Solutions. MFI-Miami will perform forensic loan audits to exploit mistakes by mortgage lenders so Loan Solutions can leverage the compliance errors to obtain better modification terms on behalf of borrowers.

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January 22, 2009 — Cincinnati-based Fifth Third Bank Corp. saw mortgage completions drop in late 2008, the company reported today, with second-half 2008 fundings of $4.1 billion down from $7.3 billion in the first half and $9.4 billion from the year before. 

Residential mortgage holdings ended last year at $9.4 billion, about the same as at the end of September. Home-equity holdings were $12.8 billion, increasing from $12.6 billion. The mortgage servicing portfolio was $40.4 billion at the end of 2008.

The company reported a $2.1 billion loss for 2008, down from a $1.1 billion profit in 2007.

Fifth Third said it has stopped originating residential homebuilder and developer loans, commercial non-owner occupied loans and all mortgage broker home-equity loans. It also implemented more stringent underwriting standards..

Fifth Third also sold approximately $3.4 billion in preferred shares to the U.S. Department of the Treasury under the TARP capital purchase program.

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January 8, 2009 — Despite $10 billion in mortgage losses since 2007, GMAC LLC said in an SEC filing today that it might continue to provide capital support to its ailing mortgage arm, Residential Capital LLC.  GMAC called the mortgage unit “an important subsidiary” and noted progress has been made in adapting ResCap to current market conditions.

In November, ResCap — which reported $9 billion in losses from the first-quarter 2007 to the third-quarter 2008 — warned that its tangible net worth fell below $1 billion, triggering a $200 million margin call and forcing it to sell $12.7 billion in servicing. It said it might not survive without continued support from its parent, GMAC.

But government financing made possible through the Emergency Economic Stabilization Act of 2008, reversed the tide. GMAC changed to a bank holding company and obtained $5 billion through the sale of senior preferred equity to the U.S. Department of the Treasury under the Troubled Asset Relief Program (TARP). The capital injection put GMAC in a better position to consider long-term strategies.

GMAC defended past decisions to support ResCap and carefully committed to further support.

“If ResCap were to need additional support, GMAC would provide that support so long as it was in the best interests of GMAC stakeholders,” the filing said. “While there can be no assurances, GMAC's recently approved status as a regulated bank holding company has increased the importance of its support for ResCap.”

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In response to the proposed Obama mortgage restructuring program, GMAC Mortgage says it will add 700 loan servicing and production positions this year.

The positions being filled include customer care jobs, loss mitigation staff and collection employees. The hirings will occur at servicing centers in Burbank, CA; Dallas; Fort Washington, PA.; and Waterloo, IA, where 250 of the positions are being added. Sixty-seven of the Waterloo positions have been filled so far this year, the company announced.

GMAC said that 300 positions are also being added to accommodate increasing refinance activity. Those employees will be housed in the four servicing centers as well as a large call center in Charlotte, NC.

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January 16, 2009 — Fourth quarter mortgage production was down by almost 50 percent from a year earlier at CitiGroup, according to the company. Last year's residential originations were $104.3 billion, down from $163.3 billion in 2007.

Fourth-quarter 2008 production was $16.6 billion, down from $22.0 billion in Q3 and from $32.0 billion a year earlier.

The third-party mortgage servicing portfolio ended the year at $646.6 billion, up slightly from $646.5 billion at the end of September and $599.6 billion at the end of 2007.

CitiBank said it held $197.4 billion in home loans as of Dec. 31, lower than $202.0 billion on Sept. 30 and $218.6 billion a year earlier.

Including loans it owns, Citi serviced $844.0 billion in mortgages at the end of last year, higher than $818.2 billion at the end of 2007.

The 90-day delinquency rate on residential loans was 4.73 percent at the end of December, climbing from 3.85 percent in the third quarter and 2.22 percent 12 months prior.

Citi reported an $18.7 billion loss for 2008 — deteriorating substantially from a $3.6 billion profit in 2007. During just the fourth quarter, the company had an $8.3 billion loss — worse than the $2.8 billion third-quarter loss but better than the $9.8 billion loss in the fourth-quarter 2007. Included in the results were $4.6 billion in subprime net write-downs, $1.3 billion in net Alt-A write-downs and $1.0 billion in commercial real estate write-downs.

The company said it will split into two divisions: Citicorp and Citi Holdings. It expects to close on a joint venture with Morgan Stanley in the second half of this year where it will get a 49 percent stake in the new entity, Morgan Stanley Smith Barney, in exchange for contributing subsidiary Smith Barney.

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Citigroup and the Treasury Department reached a deal Friday that will give the government up to a 36 percent stake in the struggling bank. The government, along with other private investors, will convert some of their $45 billion in preferred stock into common shares. If the maximum amount of preferred stock is converted, current common stockholders will see their ownership stake fall to about 26 percent.

Citigroup executives acknowledged the hit to shareholders, but said the point of the deal was to restore the market's confidence in the bank.

“In the end, our business is about confidence,” CEO Vikram Pandit said in a conference call with investors. “As a matter of fact, the entire financial system depends on confidence, and we wanted to take definitive steps to put all capital issues aside.”

The conversion to common stock will create a wider equity base aimed at keeping investors calm as the economy deteriorates — but Citigroup still has $45 billion in Troubled Assets Relief Program funding, the same amount as it did before. The switch to common stock will help boost Citigroup's “tangible common equity,” but analysts say solid TCE alone won't lure investors.

The government earlier this week said it will conduct what it calls “stress tests” to determine banks' solvency in extreme economic situations. Even if Citigroup passes the government's “stress tests” by boosting its TCE, Wall Street is not confident yet it will pass the economy's tests. Investors' skepticism was obvious Friday as Citigroup shares plunged $1.02, or 41 percent, to $1.45.

Citigroup, criticized for years for being too multi-tentacled, has already sold off several businesses over the past several months, including a controlling interest in its Smith Barney brokerage, its German retail banks, and its Diners Club credit card franchise. It has also split into two parts: Citicorp and Citi Holdings — effectively undoing the merger that created the company in 1998. Citicorp holds the company's “core” businesses like retail banking, investment banking, credit cards and transaction services, while Citi Holdings runs the company's riskier assets, the consumer finance franchises and asset management.

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