Secondary Market

Another lawsuit centered around mortgage securities backed by faulty loans may be brewing. The National Credit Union Administration (NCUA) has threatened to sue four banks and investment firms unless they refund more than $50 billion for mortgage-related bonds that went bad. Goldman Sachs, Bank of America's Merrill Lynch unit, Citigroup, and J.P. Morgan Chase are named as the targets of NCUA's legal threats. The regulator says mortgage securities sold by these companies led to the collapse of five wholesale credit unions.

Performance of commercial real estate in the United States is bifurcated, according to Moody's Investors Service, with larger properties in major markets recovering value while distressed properties remain well off the peak. New research released by the credit ratings agency shows that prices on a sub-set of non-distressed properties, which have traded for more than $10 million, are down 19 percent from October 2007. Prices of distressed properties, on the other hand, have tumbled 54 percent since October 2007.

The FDIC filed a lawsuit last week against three former Washington Mutual (WaMu) executives and two of their wives, alleging that they ran the bank into the ground in order to fatten their own wallets. The lawsuit says former WaMu CEO Kerry Killinger, former COO Stephen Rotella, and home loans president David Schneider focused on short-term gains to increase their own compensation, while encouraging risky mortgage lending when they knew the housing market was about to collapse.

Mortgage servicers were plagued with lawsuits in the last quarter of 2010, according to an industry data source. The percentage of legal actions against servicers rose 42 percent in the last three months of 2010, and actions associated with loan modifications tripled. The report said that 151 mortgage-related lawsuits were reported in the fourth quarter, jumping from 106 in the quarter before. Secondary marketing litigation nearly doubled, and criminal cases also rose.

Morningstar, Inc., a provider of independent investment research, announced Monday that its Realpoint unit has launched an operational risk assessment practice to evaluate the performance of mortgage servicing firms. Morningstar says the new practice, which is part of Realpoint's credit ratings business, will complement the company's convention of providing transparency and insight to investors in mortgage-backed securities.

On Monday the Treasury announced that it will wind down the remaining $142 billion mortgage-backed securities (MBS) portfolio it carries. This news comes just as the federal government is making plans to drastically reduce its role in the mortgage marketplace. Beginning this month, Treasury plans to sell up to $10 billion in agency-guaranteed MBS each month, with the goal of fully extinguishing the portfolio in a little over a year and turning a profit for taxpayers.

Word on the street is that Goldman Sachs is looking to sell off its mortgage servicing arm, Texas-headquartered Litton Loan Servicing. One publication's blog post says Litton never proved to be the distressed mortgage cash-cow that Goldman had hoped, while another financial news outlet reports that the servicing unit is indeed unprofitable at the moment. Industry data show that Litton's servicing portfolio has contracted by nearly 35 percent over the last two years.

Freddie Mac and the Independent Community Bankers of America (ICBA) announced Friday the extension of their eight-year alliance agreement, which gives ICBA member banks increased access to the secondary mortgage market. First announced in 2003, the Freddie Mac-ICBA partnership is designed to help ICBA members serve more customers and stay competitive in a dynamic marketplace. The new alliance agreement extends the relationship between the two organizations through March 2012.

The delinquency rate on loans included in commercial mortgage-backed securities (CMBS) conduit and fusion transactions increased 17 basis points in February to 9.18 percent, according to Moody's Investors Service. Moody's noted that while still rising, increases in CMBS delinquencies have been moderating since June 2010. During February loans totaling $4.1 billion became newly delinquent, while previously delinquent loans totaling $3.0 billion became current, worked out, or liquidated.

There were many who opposed the hefty bank bailouts after the financial crisis set in, and they still have their ethical argument against the government's decision, but the fiscal argument is growing faint. Treasury announced this week that over 99 percent of the funds disbursed to banks through the Troubled Asset Relief Program (TARP) have now been recovered. Even the largest bailout of all - that of Fannie and Freddie - is expected to shrink by nearly half over the next 10 years.