The Justice Department has launched a billion-dollar lawsuit against Deutsche Bank AG over government-insured mortgages underwritten by one of its subsidiaries that went bad. Which other lending giants might be targeted next?
Delinquency statistics for leading originators of Federal Housing Administration-backed loans may not provide a straightforward road map for which companies are in the greatest peril.
The Department of Housing and Urban Development (which includes the FHA) provides extensive data on lender volumes and performance through its Neighborhood Watch website, which is open to the public.
A key measure is the compare ratio, or the percentage of mortgages underwritten by a particular lender during a one-year or two-year period that were seriously delinquent (that is, more than 90 days past due) or produced a claim by the end of the period as a proportion of the rate for all lenders in a particular area.
A compare ratio of 100 would mean that a lender's performance was on par with the default rate for all originations. A compare ratio higher than 100 would indicate worse performance, and perhaps signal underwriting problems.
The graphs here show a group of high-volume lenders.
Wells Fargo Bank NA, Wells Fargo & Co.'s principal subsidiary and the biggest producer by a good margin with a 10.9% share of loans underwritten in the two years through the first quarter, has posted consistently low compare ratios.
The share of Bank of America NA, Bank of America Corp.'s principal banking unit, has grown substantially since the middle of 2009 and its compare ratio has deteriorated, but it still remained about at par as of the first quarter at 102.
(Countrywide Bank FSB was merged into Bank of America NA in April 2009, close to a year after Bank of America bought Countrywide Financial Corp.)
The compare ratios at MetLife Bank NA, a unit of MetLife Inc., and Freedom Mortgage Corp. in Mount Laurel, N.J., appear to have deteriorated alarmingly among entities considered here that are still operating. (Taylor, Bean & Whitaker Mortgage Corp. collapsed in 2009 and Lee Farkas, its former chairman, was convicted of fraud in April.)
But compare ratios can be deceptive, swung by factors like the "denominator effect," where increases in originations can suppress delinquency rates, and, conversely, declines in originations can exaggerate delinquency rates.
(This phenomenon helps explains the stratospheric levels the compare ratios at Countrywide and Taylor Bean reached after their origination pipelines ran dry.)
The two-year, nationwide compare ratio at MortgageIT Inc., the subsidiary at issue in the Deutsche Bank lawsuit, remained below 100 through the second quarter of 2008, about a year and a half after the German banking company bought it, providing faint indication of the types of abuses prosecutors have alleged.
(MortgageIT's compare ratio shot up to 188 by the fourth quarter of 2009, when it lost its approval to underwrite FHA mortgages, as the company ratcheted production down.)
Brian Chappelle, a partner at the consulting firm Potomac Partners LLC, said that other Neighborhood Watch data could be a sign that MetLife, which launched a major push into the mortgage business when it acquired most of First Horizon National Corp.'s mortgage platform in 2008, is getting its arms around delinquencies.
Problems that have been addressed can cast a long shadow under a two-year time horizon, and MetLife's record looks better in a narrower frame. The New York company's nationwide compare ratio during the year that ended in the first quarter was 104, down from 228 in the year that ended in the third quarter of 2010, as it slashed its volume of loans underwritten through correspondents.
Still, whatever the complexity in reading the data, it appears clear that HUD is clamping down aggressively.