M Hanson Advisors Real Estate & Finance

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1 M Hanson Advisors Real Estate & Finance The Mortgage Pages - September 8 th BAC, C, JPM, USB, WFC - The Foreclosure Quickening - Foreclosures up Sharply at all Banks in August - WFC Forecloses on More Loans than any other Bank in August - Record Foreclosure Volume at CITI, Chase and Wells - Cancelled Foreclosure Volume Moderating - Mods Losing Impact - Big Banks Front-Running the GSE s - It s Every Financial for Itself Our mission is to provide our clients a significant edge. This is done by turning the daily, market-moving real estate and mortgage news flow and events into old news by the time it makes headlines. - Mark Hanson Summary - Overview This is a bank-originator and servicer-specific proprietary data update using the nation s largest operators -- BAC, C, JPM, USB and WFC -- individually and as proxies to highlight a recent shift in the manner in which early stage defaults, as represented by Notice-of-Default filings, Foreclosures, and loan mods are being managed and an increase in their volume and velocity most notably in August. August default and Foreclosure data is not available yet outside of our practice, especially on a servicer and bank-originator specific data. But once the popular foreclosure reporting services release results mid-month and servicers towards month-end I suspect some interesting headlines and research will come of it. In short, another V -shaped recovery is occurring in the banking sector. But this time it is in distressed resi loans, as indicated by the recent flow of new and modification re-default based Notice-of-Defaults and Foreclosures. And it s occurring to a greater degree on loans which the bank s still own or have some liability vs. loans for which they only provide the servicing/loss mitigation function on behalf of other owners. This comes as reported median and average house prices hang in the mixshift balance, the (up to) five month delayed Case-Schiller heads for a downturn going into year-end as post tax-credit deal flow becomes part of the three month average, and banks continue a trend of lightening loan loss reserves something here is obviously amiss.

2 It s Every Financial for Itself Over the past couple of months, most predominantly in August, interesting bank-originator and servicer-specific default and Foreclosure activity began to show up in my data that really piqued my interest. I will need another month of data to fully confirm, but I am fairly confident that several of the large banks have broken rank, are in heavy Foreclosure/property liquidation mode, and are purposefully front-running investor loans, such as the GSE s, for which they only provide the loan servicing/loss mitigation function. For months I have warned about the likely mid-year beginning of a modification re-default cycle based upon when the big loan modification wave began, the average (lengthy) application-to-trial mod processing period, the three-to-five month trial mod period, and the month-long permanent mod finalization period. I have been waiting for the dam holding back the Foreclosure Sea to break for a long time knowing it was a matter of when and not if, and that I would be able to tell first through a series of reports I created to track just this. If I am right about the timing and about what I am seeing in the data right now, as indicated by a heavier flow of official Notice filings hitting my system over the past couple of months from loans with similar filings on the properties already in the past year, then this every bank for itself NOD through Foreclosure flow makes perfect sense. If a modification re-default cycle is upon us -- and with the back-drop of Prime and Jumbo Prime loan defaults and Foreclosures continuing to ramp -- then the past few quarters of bank loan loss reserve lightening could have to be unwound beginning as early as with q310 results. It could also bring about some quick price discovery on worthless second mortgages. And if our house price projections are accurate -- going into year-end as Case-Schiller, which is delayed up to five months finally picks up the post tax-credit sales mix shifting quickly back towards distressed prices -- then the double-whammy of increasing loan losses and decreasing house prices should catch consensus expectations by surprise. Fannie Shows Some Teeth Lastly, as I was beginning to put together this report last week, a little followed announcement came out of Fannie who appears to be all over the

3 servicers for dragging their feet. If the banks are catching heat from investors -- knowing what they know about the path of Prime and Jumbo Prime loans, Subprime and Alt-A modification redefaults, and house prices -- then this only lends more credence to the likelihood that my data are in fact pointing to a fundamental shift worse in the volume and velocity of distressed resi loans traveling through the default and Foreclosure pipeline. Fannie Mae Says Foreclosure Delays Represent a Breach by the Servicer 09/02/2010 By: Carrie Bay The nation s largest mortgage company is about to start cracking down on servicers for letting delinquent loans languish too long without action. Fannie Mae issued a notice this week alerting servicers that it is monitoring all delinquent loans in its portfolio and mortgage-backed securities (MBS) pools to ensure foreclosures are handled within an acceptable time frame. By the tone of Fannie s announcement, it wants these nonperformers off its books as quickly as possible. The GSE says it may assess penalties for poor servicer performance when it comes to completing foreclosures in a timely manner. The Data On Sept 1 st and 2 nd, I put out two reports covering aggregate bank-originator and servicer-specific default and foreclosure data for August; the first look available at resi credit as defined by bank s moving loans into the Noticeof-Default stage, through the Notice-of-Trustee Sale stage and into Foreclosure itself. Unlike traditional delinquency and default reporting, tracking NOD and NTS data in aggregate and on a bank-originator and servicer-specific basis -- the way we do -- provides unique insight as to the intentions of the banks or servicers and pace of which actual Foreclosures will occur. This is because with banks and servicers now experts at kicking the can, when a servicer

4 makes the decision to move a loan into the NOD stage for example -- or take a loan into the NTS (foreclosure-imminent stage) -- there is something seriously wrong with the deal. This is not necessarily so with 30, 60 or 90-day lates, especially with aggressive and pervasive mortgage mod initiatives masking credit performance. The bottom line to last week s report was that reported early and late stage default activity and Foreclosures increased sharply in Aug with Foreclosures again at record highs the first time banks took back over 100k properties in a single month ever. This, while Cancelled Foreclosures (indicative of loan mods) fell indicating bank s primary borrower re-leveraging mechanism is struggling. Due to these results I made a case that new-era credit has once again turned worse -- after a few quarters of modification-induced improvement that led to the bank s pulling back significant loss reserves -- in large part due to 1) osmosis from the eight million borrowers delinquent, defaulted or in Foreclosure and 2) the unintended consequences of mortgage mods -- giving bad, underwater borrowers in default more leverage in hopes they will make their payment -- in the form of a brand new channel of defaults and Foreclosures vis-à-vis modification redefaults for which the leading edge is upon us right now. Also noted in the report was that the banks were acting far more aggressively on loans they own relative to loans they only service for other lenders. This was highly telling and I believe provides a good research basis for Q3 earnings. The following bank-originator and servicer-specific reports are of the same banks as highlighted in last week s aggregate reports. The first report shows action that the bank s servicing divisions took on loans they service for others. The second is only for loans that the bank s originated and that they still service, indicating ownership or financial liability. August Foreclosure data is telling and rather surprising in some respects. Key points are: 1) In Aug, ALL banks Foreclosed on loans they own or have

5 financial interest in at a faster pace than on loans they service for other investors. 2) Foreclosures are up sharply mom at all banks save US Bank who posted a decline in only loans they service for others. However, their bank-originated Foreclosure mom rate-of-change was greater than all other banks. 3) Wells Fargo posted the largest yoy Foreclosure increase of 315% for loans they service and a whopping 450% for loans they originated. In August, they Foreclosed on more loans than any other bank. 4) CITI, Chase and Wells all posted record Foreclosure volume in August while BofA and US Bank were close. 5) Cancelled Foreclosures, indicative of loans mods, were the growth sector at banks all year but now at CITI, Chase, and Wells, actual Foreclosures are outpacing them. 6) Chase is lagging the liquidation pack and always has. Throughout this crisis Chase has lagged, often times obviously overwhelmed and confused on how to manage such a large pipeline of bad loans. When accounting for their immense second mortgage portfolio along with the addition of some of the most toxic loans ever originated that came with Bear and WaMu, Chase s official NOD and Foreclosure numbers have never been representative of the true trouble in their pipeline, which is why we have always called them the kings of can kicking. 7) Wells Fargo is leading the pack on the road to liquidation with a 53% spike in originator-foreclosures in August and a 1% decrease in Cancelled Foreclosures. Based upon the data within the data (not shown here), they are finally digging into the WB Pay Option mess -- Pay Option Foreclosures were up 100% mom and 800% yoy. 1) Bank of America a. Aug Servicer Foreclosures up 9% mom (up 220% yoy and 3 rd highest volume on record) b. Aug Originator Foreclosures up 11% mom (up 275% yoy and 2 nd highest volume on record) c. Cancelled Servicer Foreclosures up 63% mom (up 15% yoy and 3 rd highest volume on record) d. Cancelled Originator Foreclosures up 68% mom (up 40% yoy and 3 rd highest volume on record) 2) CITI

6 a. Aug Servicer Foreclosures up 22% mom (up 280% yoy and Highest volume on record) b. Aug Originator Foreclosures up 26% mom (up 300% yoy and Highest volume on record) c. Cancelled Servicer Foreclosures down 22% mom (up 400% yoy and 3 rd highest volume on record) d. Cancelled Originator Foreclosures down 25% mom (up 300% yoy and 2 nd highest volume on record) 3) Chase a. Aug Servicer Foreclosures up 3% mom (up 55% yoy and Highest volume on record) b. Aug Originator Foreclosures up 5% mom (up 50% yoy and Highest volume on record) c. Cancelled Servicer Foreclosures down 42% mom (up 375% yoy and 3 rd highest volume on record) d. Cancelled Originator Foreclosures down 41% mom (up 600% yoy and 3 rd highest volume on record) 4) US Bank a. Aug Servicer Foreclosures down 17% mom (up 35% yoy and 2 nd highest volume on record) b. Aug Originator Foreclosures up 64% mom (up 200% yoy and Highest volume on record) c. Cancelled Servicer Foreclosures down 9% mom (up 140% yoy and 2 nd highest volume on record) d. Cancelled Originator Foreclosures up 131% mom (up 400% yoy and Highest volume on record) 5) Wells Fargo a. Aug Servicer Foreclosures up 42% mom (up 315% yoy and Highest volume on record) b. Aug Originator Foreclosures up 53% mom (up 450% yoy and Highest volume on record) c. Cancelled Servicer Foreclosures up 5% mom (up 150% yoy and 3 rd highest volume on record) d. Cancelled Originator Foreclosures down 1% mom (up 200% yoy and 2 nd highest volume on record)

7 Note - the vertical blue bars in the Foreclosure and Cancelled Foreclosure rows represent dollar volume (in $bb). Shown is the mom percent change in dollar volume terms for each servicer. The second chart below is of the same banks, but highlight loans they originated and continue to service indicating ownership or potential financial liability.

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9 For further explanation as to what these data may indicate or to look at more live data on-line via out web presentation portal, please do not hesitate to

10 call. Best Regards, Mark Hanson This document is for your private information only. In publishing research, Mark Hanson and M Hanson Advisors are not soliciting any action based upon it. Mark Hanson and M Hanson Advisors publications contain material based upon publicly available information, obtained from sources that we consider reliable. However, Mark Hanson and M Hanson Advisors does not represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing on Mark Hanson and M Hanson Advisors publications only. Mark Hanson and M Hanson Advisors are not liable for any loss or damage resulting from the use of its product. Mark Hanson and M Hanson Advisors are Limited Liability Corp registered in CA. M Hanson Advisors Real Estate & Financ The Mortgage Pages - September 8 th BAC, C, JPM, USB, WFC - The Foreclosure Quickening - Foreclosures up Sharply at all Banks in August - WFC Forecloses on More Loans than any other Bank in A

11 - WFC Forecloses on More Loans than any other Bank in A - Record Foreclosure Volume at CITI, Chase and Wells - Cancelled Foreclosure Volume Moderating - Mods Losing - Big Banks Front-Running the GSE s - It s Every Financial Our mission is to provide our clients a significant edge. This is done by turning the real estate and mortgage news flow and events into old news by the time it makes Hanson Summary - Overview This is a bank-originator and servicer-specific proprietary data update using the na operators -- BAC, C, JPM, USB and WFC -- individually and as proxies to highligh manner in which early stage defaults, as represented by Notice-of-Default filings, F loan mods are being managed and an increase in their volume and velocity most n Obviously, August default and Foreclosure data is not available yet outside of our on a servicer and bank-originator specific data. But once the popular foreclosure r release results mid-month and servicers towards month-end I suspect some intere research will come of it. In short, another V -shaped recovery is occurring in the banking sector. Bu distressed resi loans, as indicated by the recent flow of new and modification reof-defaults and Foreclosures. And it s occurring to a greater degree on loans whic or have some liability vs. loans for which they only provide the servicing/loss mitiga behalf of other owners. This comes as reported median and average house prices hang in the mix-shift ba month delayed Case-Schiller heads for a downturn going into year-end as post tax becomes part of the three month average, and banks continue a trend of lightenin reserves something here is obviously amiss. It s Every Financial for Itself Over the past couple of months, most predominantly in August, interesting bank-or specific default and Foreclosure activity began to show up in my data that really pi will need another month of data to fully confirm, but I am fairly confident that sever banks have broken rank, are in heavy Foreclosure/property liquidation mode purposefully front-running investor loans, such as the GSE s, for which they loan servicing/loss mitigation function. For months I have warned about the likely mid-year beginning of a modification r based upon when the big loan modification wave began, the average (lengthy) ap processing period, the three-to-five month trial mod period, and the month-long pe finalization period. I have been waiting for the dam holding back the Foreclosure long time knowing it was a matter of when and not if, and that I would be able to te series of reports I created to track just this. If I am right about the timing and about what I am seeing in the data right now, as flow of official Notice filings hitting my system over the past couple of months from filings on the properties already in the past year, then this every bank for itself Foreclosure flow makes perfect sense. If a modification re-default cycle is upon us -- and with the back-drop of Prime loan defaults and Foreclosures continuing to ramp -- then the past few quart

12 loss reserve lightening could have to be unwound beginning as early as with could also bring about some quick price discovery on worthless second mortgages And if our house price projections are accurate -- going into year-end as C is delayed up to five months finally picks up the post tax-credit sales mix shifting q distressed prices -- then the double-whammy of increasing loan losses and d prices should catch consensus expectations by surprise. Fannie Shows Some Teeth Lastly, as I was beginning to put together this report last week, a little followed ann of Fannie who appears to be all over the servicers for dragging their feet. If the ba from investors -- knowing what they know about the path of Prime and Jumbo Prim and Alt-A modification redefaults, and house prices -- then this only lends more cre likelihood that my data are in fact pointing to a fundamental shift worse in the vo of distressed resi loans traveling through the default and Foreclosure pipelin