The servicing settlement being negotiated between state attorneys general and major banks will likely require principal reduction via loan modifications and possibly refinances. Principal reduction, however, will likely only be required for certain mortgages held in bank portfolios. The Federal Housing Finance Agency has refused to allow principal reduction on mortgages serviced for the government-sponsored enterprises. Non-agency mortgage-backed security investors, meanwhile, have been more accepting of principal reduction of late but the vast majority of such mod activity is already concentrated on portfolio loans. ...

Ratings by DBRS of new non-agency mortgage-backed securities will include analysis of several factors at the metropolitan statistical area level. The new rating methodology and loss model were released last week without substantive changes from the proposal the rating service issued in October. “The experience of the last decade has made it apparent that it is not credible to consider loan performance without factoring in house prices and unemployment rates,” DBRS said. ...

Non-agency investors will not support new mortgage-backed securities until lenders and issuers establish stringent standards for originations and securitization, according to industry participants. “You’re going to need something to convince people – at least in the top tier – that their credit risk is pretty low,” David Lukach, a partner and head of the U.S. structured finance group at PricewaterhouseCoopers, said at a discussion hosted by the Securities Industry and Financial Markets Association last week. ...

A subprime-related fair lending lawsuit was allowed to proceed to discovery last week in Illinois. In 2009, Lisa Madigan, the state’s attorney general, filed a lawsuit against Wells Fargo alleging that the lender steered minorities into high-cost subprime mortgages. ... [Includes three briefs]

Wells Fargo was the top jumbo lender in 2010, according to a ranking by Inside Nonconforming Markets based on Home Mortgage Disclosure Act data compiled by ComplianceTech/Lending Patterns. Wells had $40.87 billion in originations greater than the $417,000 standard conforming loan limit in 2010. ... [Includes one data chart]

Home Equity Conversion Mortgage lenders may now use certain financial assessment criteria in qualifying consumers for a HECM loan prior to FHA’s publication of its own guidance. Officials from the Department of Housing and Urban Development broke the news during the recent National Reverse Mortgage Lenders Association annual conference in Boston. They said the new underwriting assessment tool would help ensure borrowers can pay required taxes and insurance on their homes. The notification followed the unveiling of the NRMLA’s recommended underwriting guidance. In a previous email notice to industry participants, Acting Assistant Secretary of Housing/FHA Commissioner Carol Galante indicated that ...

Redwood Trust took a loss on the $375.2 million jumbo mortgage-backed security it issued at the end of September, officials at the real estate investment trust revealed this week. However, the company plans to issue another jumbo MBS within the next few months and anticipates turning a profit on its non-agency activity in the long-term. ...

Ocwen Financial’s pending purchase of subprime servicer Saxon Mortgage is just the latest growth spurt for the firm. “We are looking at other transactions as we speak,” William Erbey, chairman of Ocwen, said last week on a call with investors. Even with the Saxon deal, Erbey said Ocwen’s pipeline of potential acquisitions increased in the third quarter of 2011 compared with the previous quarter, to more than $300.0 billion in unpaid principal balance. ...

Prospects for a return of elevated conforming loan limits remain unclear after the Senate approved a reinstatement provision in an appropriations bill in October. Most conservatives in the House remain strongly opposed to the reinstatement – which would likely delay the return of the non-agency market. More than 30 percent of members of the House support a temporary reinstatement of elevated conforming loan limits, according to a letter sent to House leaders this week. ...

The stellar returns on non-agency mortgage-backed securities purchased via the Public-Private Investment Program have faltered this year, prompting some to call for a revamp of the program. Invesco – the fund that has seen the most success with the PPIP – also recently announced that it quit the program after having difficulties finding appropriate investments. ... [includes one data chart]