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55 » VISIT US ONLINE @ DSNEWS.COM U.S. BANK SUES BANK OF AMERICA OVER RMBS ISSUES U.S. Bank has sued Bank of America, claiming that "a company it acquired sold defective mortgages to a $2 billion residential mortgage-backed securities [RMBS] trust and failed to disclose problem mortgages to the trust's investors," Reuters reported. According to Reuters, U.S Bank has alleged that Bank of America predecessor company First Franklin Financial Corp. "breached its contractual duties by selling the defective mortgages and failing to repurchase them after problems surfaced." U.S. Bank filed the suit in "its capacity as trustee for the RMBS trust." e case is just the latest in a long line of wide-ranging litigation stemming from the financial crisis, many of which are still being resolved. In 2015, Prudential Insurance Co. moved to settle its lawsuits with Bank of America NA, Merrill Lynch & Co. Inc., and First Franklin Financial Group. e suits, which were first filed in March 2013, alleged that Bank of America and others knowingly sold Prudential $2.1 billion in low-quality mortgage-backed securities—and made false statements about them. Prudential claimed this left the company with more than 10,000 defective home loans, many that eventually went into default or foreclosure. Morningstar Credit Rating's research reported that RMBS credit performance backed by nonqualified mortgage loans remained strong in Q1 2019. Morningstar's report indicated that, while high prepayment levels may typically indicate poor loan quality, the trend of recent relatively high prepayments has not impacted credit quality. Morningstar's report states that prepaid loans and the remaining loans have a similar credit quality, noting that many deals have seen prepayment rates above 20%. "As noted in our RMBS outlook for 2019, we expect non-QM RMBS issuance to continue to increase in 2019, with the credit quality of the collateral weakening somewhat but remaining overall consistent with the prior year," said Morningstar in a release. "Also, we expect the non-QM RMBS transaction structures to evolve as issuers explore ways to optimize funding costs and maximize proceeds from securitization." Government-backed loans as a whole have seen a resurgence. Kroll Bond Ratings Agency reported a 63% increase in residential mortgage-backed securities issued in 2018 over 2017. e report indicated that if the U.S. GDP was to grow at the steady pace it has this year, until July 2019, the year could see "another robust issuance year in 2019." However, factors such as higher interest rates, home price moderation, and widening spreads that have been experienced by the market in the last few weeks are likely headwinds that might pull down the performance of RMBS next year, the report revealed. UNDERSTANDING DEFAULT RISK Default risk rose slightly in Q1 2019, according to the latest University Financial Associates (UFA) Default Risk Index, a measure of the risk of default on newly originated prime and nonprime mortgages. UFA notes that under current economic conditions, investors and lenders should expect defaults on loans currently being originated to be 14% higher than the average of similar loans originated in the 1990s, solely due to the local and national economic environment. "Although lower mortgage rates are providing a boost to the housing market, on balance monetary policy metrics and our housing forecasts are weaker this quarter," said Dennis Capozza, Professor Emeritus of Finance at the University of Michigan and founding member of UFA. "In most of the regions, the UFA forecasts see real price declines within two years. As a result, the UFA Default Risk Index continues to creep higher." Black Knight data recently reported that mortgage delinquencies dropped to 3.47% as of April, the lowest point on record and that the 5.51% month-over-month decline between April and March was the strongest single-month April improvement Black Knight has seen. Serious delinquencies have fallen to a 12-year record low as well, down to 474,000, marking a 124,000 year-over-year decline. Despite the declines, foreclosure starts edged up month-over-month by 4.28%, putting the total at 41,400. Year-over-year, however, foreclosure starts declined by 16.02%. CoreLogic recently reported similar trends in delinquency. According to CoreLogic's latest Loan Performance Insights report, the number of mortgages that were delinquent more than 30 days decreased slightly year-over-year to 4%. e report states the nation's overall delinquency rate has fallen on a year- over-year basis for the past 14 consecutive months. CoreLogic stated that the decreases were attributable to the strength of loan vintages in the years since the residential lending market recovered following the housing crisis.

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