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» FITCH COMMENTS ON JPMORGAN'S AND WELLS' RECLASSIFICATION OF 2ND LIENS With their 2012 first-quarter earnings, JPMorgan and Wells Fargo revealed the reclassification of $1.6 billion and $1.7 billion, respectively, in second lien mortgages as nonperforming loans even though they are not yet delinquent. Fitch Ratings said many U.S. banks are likely to follow suit, and it does "not view this as a material shift in the performance of these loans." Both banks cited regulatory guidance as reasons for the reclassification. The reclassified loans are second liens associated with delinquent first liens. In cases involving delinquent loans, second liens are written off before a first lien takes any losses. According to a Bloomberg article, of JPMorgan's $1.6 billion in second liens that were classified as nonperforming, $1.4 billion were still current as of March 31. "However, increased regulatory scrutiny of second liens may continue to affect the way banks account for potential losses on these portfolios," Fitch said. The report from Fitch also noted the recent debate to have principal reductions applied to Fannie Mae and Freddie Mac loans, which Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), has not allowed so far despite mounting pressure. If principal reductions were allowed, eligible second liens on GSE loans would be written down proportionally, not written off. According to a note from the Treasury Department, "Under HAMP, where a first lien mortgage is modified, then the holder of an eligible second lien must modify that lien proportionately if they are a participant in the Second Lien Modification Program (2MP)." Almost half, or about 47 percent, of all HAMP modifications during the 2011 fourth quarter were GSE loans, according to the Office of the Comptroller of the Currency, and FHFA estimates that roughly half of all HAMPeligible loans have a second lien associated with them. "We would likely revisit our loss estimates on second lien loans if there is a sufficient increase in principal modification activity," Fitch stated. Fitch also said roughly half of the $850 billion in outstanding second liens is concentrated at the five largest banks, including Bank of America, which has one of the largest second lien portfolios in the United States. VISIT US ONLINE @ DSNEWS.COM MBA FINDS DELINQUENCIES AND FORECLOSURE STARTS DOWN, INVENTORY UP SLIGHTLY IN FIRST QUARTER On the national stage, delinquency rates and foreclosure starts decreased on a quarterly and yearly basis in the first quarter of 2012, with foreclosure inventory the exception. It increased slightly compared to the previous quarter, according to a market analysis report presented by the Mortgage Bankers Association (MBA) last month. The trade group reported the delinquency rate was 7.40 percent on a seasonally adjusted basis in the first quarter of this year compared to the 2011 fourth-quarter rate of 7.58 percent and the year-ago quarter's 8.32 percent. On a non-seasonally adjusted basis, the delinquency rate saw an even greater decrease at 6.94 percent compared to the previous quarter's 8.15 percent and 7.79 percent a year ago. "Mortgage delinquencies normally fall during the first quarter of the year, but the declines we saw were even greater than the normal seasonal adjustments would predict, so delinquencies are clearly continuing to improve," said Michael Fratantoni, MBA's VP of research and economics. Loans in the 30-day delinquency bucket claimed a rate of 3.13 percent, 60-plus delinquencies had a rate of 1.21 percent, and those 90 days or more past due were 3.06 percent of all outstanding mortgages. Of the three late-pay stages, loans 30 days past due saw the greatest quarterly decrease, dropping 9 basis points, while loans 90 days or more delinquent had the greatest yearly decrease, falling 56 basis points. The rate of loans in the seriously delinquent category, which includes 90-plus loans and foreclosures, was 7.44 percent, a quarterly and yearly drop of 29 and 66 basis points, respectively. Fratantoni added that as of March 31, the percentage of loans one payment past due had dropped to its lowest level since the middle of 2007, and loans three payments or more past due were at their lowest point since the end of 2008. Also, MBA found that the first quarter of 2012 saw the fewest foreclosure starts since the end of 2007. Foreclosure inventory, on the other hand, saw a small quarterly increase of 1 basis point after ending at 4.39 percent in the 2012 first quarter. Last year at the same time, foreclosure inventory was 4.52 percent, 13 basis points above the level of foreclosure inventory in the first quarter of 2012. Fratantoni explained the underlying trends he's seeing in the data that are contributing to the increase in foreclosure inventory. "First, the percentage of loans in foreclosure is up for prime and FHA [Federal Housing Administration] loans. The percentage of subprime loans in foreclosure continues to fall as the subprime loans age and the problem loans are resolved one way or the other. However, the percentages of loans in foreclosure for both FHA loans and prime fixed-rate loans are climbing and are just below all-time records," he said. According to the MBA's data, 60 percent of loans in the seriously delinquent stage were originated between 2005 and 2007. Foreclosure inventory in judicial states also continues to be a problem, with the percentage of loans in the foreclosure pipeline at 6.88 percent compared to only 2.77 percent in nonjudicial states. Fratantoni pointed out that the foreclosure start rate is essentially the same in both types of state jurisdictions, with the difference in foreclosure inventory due entirely to the systems some states have in place that block timely resolution of non-performing loans. The national average for foreclosure inventory was 4.39 percent, and in non-judicial states, only Nevada was above the average at 6.47 percent, while in judicial states, about half, or 10 states, were above the national average. The five states with the highest share of loans in foreclosure inventory—Florida, California, Illinois, New York, and New Jersey —account for 52.4 percent of the entire nation's foreclosure tally. As for delinquencies in individual states, Fratantoni said the improvement in loan performance was widespread, with only four states—Maryland, Delaware, New Jersey, and Washington—experiencing increases in their 90-plus day delinquency rates. He further added that 41 states saw decreases in foreclosure starts and 22 states experienced declines in the percentage of loans in foreclosure. MBA's survey includes 42.8 million loans on one-to-four-unit residential properties, representing approximately 88 percent of all first-lien residential mortgage loans outstanding in the United States. 33