Variations on the treatment of extraordinary expenses in jumbo mortgage-backed securities have prompted the rating services to alert investors. A warning on this issue last week by Fitch Ratings follows similar concerns raised by other rating services. Extraordinary expenses in non-agency MBS can be caused by legal claims against the trust, costs associated with a third-party reviews to identify representation-and-warranty breaches, and costs related arbitration, among other issues ...

CORRECTION: A March 14, 2014, story in Inside Nonconforming Markets with the headline “Credit Suisse Taps New Penn for Another Jumbo MBS” stated that according to Standard & Poor’s, due-diligence firms found that New Penn Financial allowed exceptions to its underwriting guidelines for some mortgages included in CSMC Trust 2014-SAF1. In fact, the underwriting exceptions were allowed by Credit Suisse on mortgages from lenders not identified by S&P ... [Includes three briefs]

Bank of America and James Nutter & Co. have agreed to indemnify the Department of Housing and Urban Development to resolve allegations that they failed to perform due diligence in underwriting Home Equity Conversion Mortgage loans. An audit of the HECM program by the HUD Office of Inspector General found that the financial institutions allowed 33 HECM borrowers to take out more than one loan, a violation of program requirements. The program requires borrowers to reside in the mortgaged residence as their principal residence. In addition, borrowers may not have more than one principal residence at the same time. In BofA’s case, one borrower obtained two HECM loans on properties she owned in Massachusetts and Florida, both of which she identified as her principal residence. The HUD OIG said there was sufficient information to alert BofA and the underwriter that ...

Overall FHA production fell significantly in all 50 states in 2013 apparently due to mortgage insurance premium increases and policy changes that made it difficult for even qualified borrowers to obtain an FHA-insured single-family loan. FHA volume by state dropped 27.5 percent in the fourth quarter to $35.8 billion, from $49.4 billion in the previous quarter, with all states showing varying percentages of decline during the period. Year over year, production by state declined by 9.2 percent, data showed. Total FHA originations were $211.3 billion for 2013, with the first quarter ending strongly with $63.7 billion. Production, however, lost steam over the next three quarters. Among the top five FHA states, Virginia suffered the largest quarterly drop, 35.2 percent, in FHA volume. California was the top FHA producer state with $35.2 billion for a ... [2 charts]

The underwriting characteristics on the latest risk-sharing transaction from Freddie Mac have loosened somewhat compared with previous Structured Agency Credit Risk deals, prompting default expectations well above those projected for recently issued jumbo MBS. However, the government-sponsored enterprises’ risk-sharing transactions are still seen as good investments and investor demand has been strong. Freddie is preparing to sell a total of $966.0 million in three tranches to investors based on a reference pool with an unpaid principal balance of $28.15 billion. The deal priced this week. Freddie said more than 75 investors bought in and the deal was oversubscribed. The top tranche on STACR 2014-DN2 available for sale to investors is set...

A North Carolina federal magistrate has recommended that a Justice Department fraud case against Bank of America be dismissed, but he also said a separate Securities and Exchange Commission lawsuit against the bank based on a different federal law should proceed. The DOJ last August filed suit against BofA under the Financial Institutions Reform, Recovery and Enforcement Act, accusing the bank of defrauding investors in the sale of $855 million of non-agency MBS. Last week, U.S. Magistrate David Cayer of the U.S. District Court for the Western District of North Carolina found that the government failed to prove the bank made “material” false statements to the former Federal Housing Finance Board. The DOJ claimed...

Lowering Fannie Mae and Freddie Mac loan limits is one of the easiest levers the federal government could pull to increase non-agency participation in the mortgage market but most market participants favor keeping them at their current levels. In December, the Federal Housing Finance Agency announced that it was considering reducing the loan “purchase limits” for the government-sponsored enterprises. Under the plan, the GSEs could not purchase loans exceeding ...

With just one accord this week, the Federal Housing Finance Agency more than doubled the amount it has recovered on behalf of Fannie Mae and Freddie Mac from issuers and underwriters that sold subprime and Alt A MBS to the government-sponsored enterprises. Bank of America agreed to a $9.3 billion settlement that covers its own dealings as well as those of Countrywide Financial and Merrill Lynch, which it acquired in 2008. The agreement covers some $57 billion of MBS issued or underwritten by these firms. BofA did not admit...[Includes one data chart]

If all goes as scheduled, the most prolific issuer of jumbo mortgage-backed securities since 2010 won’t issue a jumbo MBS in the first quarter of 2014, the first quarterly blank for the firm since the end of 2011. Redwood is planning to issue a $347.30 million jumbo MBS on April 2; the deal priced this week. It’s the first jumbo MBS from the real estate investment trust since November. Officials at Redwood said a lack of demand from investors has limited issuance of jumbo MBS ...

The Consumer Financial Protection Bureau’s ability-to-repay requirements and standards for qualified mortgages will prompt greater rating-service scrutiny of lenders that participate in the non-agency mortgage-backed security market. Fitch Ratings noted last week that its new criteria for non-agency MBS with mortgages that have loan applications that were received on or after Jan. 10 will require additional analysis, including an expanded review of underwriting processes ...