LandAmerica surprised investors this week by postponing the planned release of third-quarter results. Four other major companies — that, along with LandAmerica, controlled 93 percent of the $14 billion U.S. title insurance market in 2007 — have all reported third-quarter losses (see Inman News story).

Fidelity, which reported a $198 million third-quarter loss after strengthening reserves in light of rising claims, says the merger of the two companies will create at least $150 million in “synergies.” Fidelity sees opportunities to cut costs and boost efficiency by eliminating redundancies in corporate and administrative overhead, direct and agency operations, and claims management and processing.

In a conference call with investors, FNF Chairman William Foley signaled that both companies might see layoffs.

“We have our own synergies we have to take a hard look at, because it’s not just a merger of LFG into FNF, and LFG employees and systems are discarded,” Foley said. “We’re basically going to take the best of both companies and end up with a much stronger organization at the end of the day.”

The deal is expected to close by the end of February or March, Foley said, and “We do expect to realize these synergies, a good piece of the synergies, upon the consummation of the transaction.”

Both companies have already downsized considerably during the downturn. In announcing a $50 million second-quarter loss in July, LandAmerica said it had laid off 3,600 employees in the last 12 months. Fidelity recently reported closing 115 title and escrow offices during the third quarter and laying off 1,000 workers.

Antitrust issues

Based on Fidelity’s 26 percent market share in 2007 and LandAmerica’s 19 percent share, the combined companies could end up with 45 percent of the U.S. title insurance market. The nation’s biggest title insurer, First American Corp., enjoyed a 30 percent market share in 2007. If Fidelity’s plan to acquire LandAmerica is consummated, the nation’s two biggest title insurance companies would control approximately 75 percent of the title insurance business.

That might raise the concern of antitrust regulators. Fidelity is instituting a 10 to 20 percent increase in rates across the country, and the proposed merger doesn’t change those plans, Foley said.

But Foley said antitrust review of consolidation in the title insurance industry generally centers around the control of real estate information and data at the county-by-county level.

“In the case of LandAmerica, they’re actually a user of FirstAmerican’s title records system, and only a small percentage (of the companies subsidiaries have their own) title plants,” Foley said. “That being the case, and if the (Federal Trade Commission) is consistent (with) past approaches to this kind of transaction, we don’t anticipate an antitrust issue.”

LandAmerica shareholders, who would receive 0.993 shares of Fidelity common stock for each LandAmerica share they own, must also sign off on the deal.

Last year, one of LandAmerica’s biggest shareholders, Viking Global Performance LLC, urged the company’s board of directors to explore the sale of the company, claiming that the synergies resulting from a merger with a larger competitor could exceed $200 million (see story).

Although LandAmerica’s board was cool to the idea at the time, the continuing credit crunch and worsening economy may now have given the company little choice in the matter.

Fidelity said its title insurance subsidiaries will provide liquidity to LandAmerica equal to the statutory book value of LandAmerica’s two primary title insurance subsidiaries, Commonwealth Land Title Insurance Co. and Lawyers Title Insurance Corp. The money will be used to repay debt LandAmerica owes under a revolving credit facility and private placement of senior notes, the companies said.

Fidelity believes that the merger may allow it to pay down some of its own debt, reducing the combined debt of the companies by $250 million and allowing Fidelity to maintain its current debt-to-capitalization ratio of 30 percent. Fidelity subsidiary Chicago Tile Insurance Co. will also provide a $30 million secured credit facility to LandAmerica.

“The unprecedented credit freeze and depressed real estate market have negatively impacted our business to the point that it has become increasingly difficult for LandAmerica to remain an independent public company,” LandAmerica Chairman and CEO Theodore Chandler said in a statement.

The merger agreement also gives Fidelity until Nov. 21 to conduct a due diligence review of LandAmerica’s books. If Fidelity unearths any surprises that weren’t disclosed during the merger negotiations, the company might back out of the deal.

Foley said the negotiations were held in the course of a few days, and that Fidelity “just didn’t have time to go in” and do the customary due diligence.

“The intention is not to find a reason to not do the transaction,” Foley said. “The intention is simply to validate what we believe we already know about LandAmerica and its systems and its people, and we’re very hopeful the due diligence period will simply expire as a matter of course and the transaction will be firmed up.”

Heavy discounting on foreclosed homes and low interest rates continued to power a homebuying spree across the West in September, sending sales of existing homes in the region soaring at an annual pace reminiscent of the days of the housing boom, according to two reports Friday.

About 100,000 existing homes and condos were sold last month in the 13-state region. Without adjusting for seasonal factors, sales were up nearly 43 percent from the same month last year, but declined 9.6 percent versus August’s total, according to the National Association of Realtors.

With sharply discounted foreclosures making up a larger slice of overall sales, the median price in the West plunged almost 19 percent from a year ago to $253,600 - slightly higher than what the median was five years ago, the association said.

Nationally, existing home sales rose 7.8 percent from September 2007, but declined 9.6 percent from August last year, on an unadjusted basis. The U.S. median price tumbled 9 percent to $191,600.

In the West, where foreclosures have been particularly pronounced, the region led the nation in terms of sales pace and median home price declines.

Las Vegas, Los Angeles, Phoenix and San Diego posted the sharpest spike in home sales last month, according to the Associated Press-Re/Max Monthly Housing Report, released Friday. The data includes all home sales recorded in the metro area by all local agents, regardless of company affiliation.

Los Angeles, San Francisco, San Diego and Phoenix were among the top five metros to post the steepest median price decline in the U.S., with Detroit second overall behind Los Angeles.

The year-over-year surge in sales might appear like the makings of a turnaround, but housing experts are quick to downplay that scenario.

For one, they note the easy comparison to September 2007’s sales, which were dismal in the wake of the credit crunch that started just months before, drying up lending for all but traditional conforming loans at $417,000 or below.

In California alone, that caused some 30 percent of real estate contracts to fall through, according to the National Association of Realtors.

As the financial crisis has spread and deepened in recent weeks, it has also cast doubt on a budding housing recovery.

“We’re headed toward a very serious recession, maybe one of the worst ones since at least the ’80s, and when people lose their jobs, when there isn’t job growth, people don’t move around, so homes don’t sell as much,” said Patrick Newport economist at IHS (nyse: IHS - news - people ) Global Insight. “These numbers are for September, so they don’t reflect what happened in October, when the market really started to freeze up.”

In general, a healthy housing market is defined as one where all kinds of homes are selling, not just bargain-basement foreclosed properties, Newport added.

Such concerns weren’t in play for buyers in Las Vegas, who drove sales up by 163 percent compared to a year ago, according to the AP-Re/Max report.

“There’s been definitely an uptick in activity,” said Mike Dobranski, who sells real estate at Prudential Americana Group in Las Vegas.

He’s seeing a mix of first-time homebuyers taking advantage of low-priced foreclosures and investors, many of them foreign buyers from Canada and Great Britain.

Homes listed at below $300,000 are luring multiple offers, while those above are having a tough time getting any takers, Dobranski said.

“The market has pretty much split in two,” he said.

Driving the trend are banks that have begun pricing foreclosed properties below market value, then sit back as bargain hunters drive prices back up.

The median price of a single-family home in Las Vegas fell almost 32 percent from a year ago to $195,000. It declined 7.1 percent from August’s median, according to the AP-Re/Max report.

Many buyers also rushed to take advantage of seller-funded down payment assistance programs and a lower down payment threshold to qualify for a Federal Housing Administration-insured loan, Dobranski said.

One of those buyers is Sean Brooks, a financial analyst in Las Vegas.

He and his wife bought a four-bedroom, two and a half-bath house last month for $200,000.

The couple - first-time homeowners - began looking in June, but ended up combing exclusively through listings of foreclosed homes because they were the only properties that were in their price range.

“We knew the market was going to come down after all the prices skyrocketed,” said Brooks, 26. “I didn’t know the market was going to go down this much.”

Brooks said he didn’t have any misgivings about entering the housing market at a time when the nation is facing major economic turmoil and home prices are forecast to continue to decline for many months.

“The way we were looking at it, we’re going to be in this house for 10 years,” he said.

Outside of the Southwest, sales also rose in metros areas, including Denver, Salt Lake City, and Boise, Idaho.

Sales tumbled, meanwhile, in other areas, including Seattle, Honolulu, and Portland, Ore., and Billings, Mont.

Steve Walton, a real estate agent for Century 21 Hometown Brokers in Billings, said he expects October sales numbers will be down even further.

“Buyers are difficult to come by right now,” Walton said, noting the number of sellers remains steady. “We didn’t see a falloff in sales until the last two or three months.”

Even though the economy in Billings strong, the perception of mounting negative U.S. economic news has many sellers concerned, Walton said.

“I don’t think reality has changed; perception has changed,” he said. “We’ve got folks who are saying ‘I think it’s going to get worse, or it could get worse, I don’t want to be stuck with it if it gets worse.”

AP Economics Writer Martin Crutsinger in Washington contributed to this report.

The Bush administration’s plan to allow the Treasury Department to buy up to $700 billion in troubled mortgage-related assets could help thaw the credit crunch by helping big financial firms move bad loans off their books.

But critics of the plan want the government to provide more protections for taxpayers and help for individuals struggling with their mortgage payments — goals that may be inherently contradictory.

The battle that’s shaping up in Congress over the plan isn’t expected to derail it, but the debate over its particulars could complicate or delay its implementation, as lawmakers must authorize the issuance of the Treasury securities that would finance it.

While the plan put forward by Treasury Secretary Henry Paulson on Saturday seems simple enough on its face, the details of how it is implemented could have profound implications for the hardest-hit housing markets and the plan’s ultimate cost to taxpayers.

Once taxpayers are in charge of these assets, will troubled borrowers be more likely to get loan modifications or workouts to keep them in their homes? If the government becomes the owner of hundreds of thousands of foreclosed homes, will it sell them quickly at fire-sale prices to investors, or more gradually over time to earn a better return?

While there is general agreement that the government must take action to keep the financial system functioning, the question then becomes: What happens next?

“You save the banking system, now what are you going to do with all this distressed property?” said Dennis Hedlund, president and founder of the mortgage market forecasting firm iEmergent.

As detailed by Paulson, the plan envisions that the mortgage-related assets Treasury buys would be managed by private managers “to meet program objectives.”

If the government creates aggressive objectives to keep people in their homes — by forgiving some of the principal on their loans, for instance — “that could very quickly solve a lot of problems” in housing markets where prices continue to fall, Hedlund said. But that approach would mean larger losses up front, and perhaps a bigger bill for taxpayers in the long run.

“If the government does more modest workouts and hopes home values sort of correct themselves, there’s a danger home prices would continue to fall, and this could really stretch out,” Hedlund said. “It’s really a question of how fast do you want to get it over with? The faster you want to get it over with, the more the government will foot the bill, so there will be political pressure not to do that.”

Hedlund said a less aggressive approach at preserving home ownership could have a “devastating” impact on 50 to 60 urban areas, and rural communities with large numbers of moderate-income homeowners.

“My opinion is that the recovery back to normal lending patterns and purchase trends easily could be five years,” Hedlund said. “This thing could go on forever, especially if nothing happens to (check the decline in) home prices.”

In an e-mail to clients, K&L Gates attorney Larry Platt noted that Treasury has not spelled out any requirement to seek to preserve home ownership or otherwise deal with foreclosures and loss mitigation, “which is one of the biggest criticisms leveled at the plan by the Democrats. That doesn’t mean that Treasury will not implement an ambitious loan modification program; it just means that (as proposed Saturday) Treasury does not have to do so.”

During the savings and loan crisis, the Resolution Trust Corp. disposed of assets over a period of four years, said Donald Kelly, a spokesman for real estate valuation company Zaio Inc.

Kelly said commentators are suggesting that the Treasury would buy troubled assets at a discount, but with the design of managing them with a possibility of a positive return for the government down the road.

“There is a real sense of urgency, in the financial markets, within the administration, and in Congress,” Kelly said in an e-mail. “One thing is clear: Decisive action must be taken and taken soon. Postponing a solution will only cause additional instability. From what I have seen, FHA and the secondary market players are ready to continue operations now, but to some extent it is conditional as everyone awaits the details of the financial stability package.”

Many securities are being valued at pennies on the dollar due to the very high leverage ratio and illiquidity of some mortgage-backed securities, National Association of Realtors President Richard Gaylord said in a statement.

“Unrealistically low valuations are paralyzing the balance sheets of financial institutions and have hindered liquidity flow,” Gaylord said, urging Congress to take action to “stabilize financial markets to allow rational valuation of assets, expedite refinancing and relief efforts for homeowners, and … reestablish a level of confidence in the housing credit markets.”

Some Democrats and consumer groups see the Paulson plan as an opportunity to push through new restrictions on lenders and help for borrowers that didn’t make it into HR 3221 — the sweeping housing bill signed into law on July 30 — or other recent housing legislation.

The Center for Responsible Lending, for example, has renewed a push for Congress to allow bankruptcy judges to rewrite the terms of troubled borrowers’ mortgages — an idea that has the support of presidential candidate Barack Obama. The lending industry has opposed granting judges such power, saying it would worsen the credit crunch by undermining investors’ confidence in mortgage-backed securities.

The center maintains that judicial modifications — derided as “cramdowns” by industry critics — would save 600,000 homes from foreclosure, while the Paulson plan to buy mortgage-related assets would save none.

“Only by preventing the 6.5 million foreclosures expected in the next few years — and the $356 billion drop in surrounding property values that will result for an additional 46 million families — will the economy begin to recover,” the center said in a statement.

Rep. Henry A. Waxman, the California Democrat who chairs the House Committee on Oversight and Government Reform, expressed “serious reservations” about the Paulson plan in a statement, saying it “appears designed to maximize returns for Wall Street and minimize protections for the taxpayer.”

The Mortgage Bankers Association said resurrecting bankruptcy cramdowns would be “wholly unproductive” and “runs counter to the bipartisan efforts to restore liquidity to the global capital markets.” The issue is irrelevant, the group said in a statement, because once the Treasury buys distressed mortgages, it can write down loan balances itself, without Congress giving bankruptcy judges that authority.

Senate Banking Committee Chairman Chris Dodd, D-Conn., today released Democrats’ proposed changes to the Treasury plan, which include granting bankruptcy judges the power to modify mortgages.

“After a year of efforts to get servicers and lenders to modify loans, the industry’s voluntary HOPE Now program has fallen far short of what is needed,” Dodd said in a statement posted on the Banking Committee’s Web site.

Dodd’s proposal would allow the Treasury Department to buy a wide range of troubled assets but would require it to hand over mortgage loans and mortgage-backed securities to the Federal Deposit Insurance Corp. (FDIC) for management.

The FDIC, Dodd said, “has shown a commitment to modifying mortgages both to ensure long-term affordability and to protect the taxpayer. The FDIC estimate performing loans are worth about 87 percent of their face value, while nonperforming loans are worth only about 36 percent of par. “Modifying loans to ensure affordability increases the value of the loans,” Dodd said.

Democrats will also push for looser criteria for the Federal Housing Administration’s HOPE for Homeowners loan guarantee program, which was authorized at $300 billion in HR 3221

Supporters of the Paulson plan say that without quick government intervention, the financial system is in danger of collapse. Keeping investment dollars flowing into mortgage lending will eventually help slow the decline in home prices in some markets, they say.

In a statement, President Bush acknowledged there will be differences over some details of the plan, “and we will have to work through them. That is an understandable part of the policy-making process. But it would not be understandable if members of Congress sought to use this emergency legislation to pass unrelated provisions, or to insist on provisions that would undermine the effectiveness of the plan.”

As Congress kicks off a week of debate — Dodd’s Senate Banking Committee will hear from Paulson and Federal Reserve Chairman Ben Bernanke Tuesday, and the House Financial Services Committee has scheduled a hearing for Wednesday — lawmakers will also be looking for clarification on details of the plan that are, for the moment, unclear.

In his e-mail to clients, Washington, D.C.-based K&L Gates attorney Platt outlined some important issues still to be resolved, such as what assets Treasury would be authorized to buy.

The Treasury Department has defined “mortgage-related assets” as “residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages” originated or issued on or before Sept. 17.

Platt said Treasury appears to be preparing to buy loans regardless of priority of the lien or the purpose of the loan — meaning investor loans would be eligible. While it doesn’t look like credit default swaps or other “synthetic instruments” tied to performance of mortgage pools would be included in the plan, “the phrase ‘related to’ could encompass a wide array of instruments that bear some indirect relationship to mortgage loans,” Platt said. “We’ll have to see.”

U.S. home prices were down 5.3 percent in July compared to a year ago, and fell 0.6 percent from the month before, according to a monthly government price index.

That compares with a 5 percent annual decline and no month-to-month decline in June, according to the Office of Federal Housing Enterprise Oversight (OFHEO).

OFHEO’s monthly index tracks only sales of homes relying on loans that are purchased or guaranteed by Fannie Mae and Freddie Mac, and may understate price declines and appreciation in some markets because it excludes mortgages too large or risky for Fannie and Freddie.

The index showed monthly price declines in all nine U.S. Census Divisions, with prices falling hardest in the mid-Atlantic division (New York, New Jersey and Pennsylvania) and least in the West North Central Division (North Dakota, South Dakota, Minnesota, Nebraska, Iowa, Kansas and Missouri).

The index puts the cumulative decline in U.S. housing prices at 5.8 percent since an April 2007 peak.

By Inman News, Wednesday, September 24, 2008.

The FBI has expanded its investigation of potential fraud by companies involved in mortgage lending during the housing boom to include Fannie Mae, Freddie Mac, American International Group Inc. and Lehman Brothers Holdings Inc., the Associated Press reported.

Citing two anonymous law enforcement officials, AP said the FBI is now looking at 26 companies to determine whether any participated in accounting fraud, insider trading, or failing to disclose the true value of mortgage-related assets.

Securities and Exchange Commission Chairman Christopher Cox said Tuesday that the SEC has more than 50 ongoing investigations into the valuation of such assets.

Testifying at a Senate Banking Committee hearing on the Bush administration’s proposal to borrow up to $700 billion to buy mortgage-related assets, Cox said the SEC investigations are focused on subprime lenders, investment banks, credit rating agencies, insurers, and broker-dealers who sold mortgage-backed investments to the public.

Fannie Mae and Freddie Mac were placed under government conservatorship on Sept. 7, and in a deal finalized today the government has taken a majority ownership stake in AIG in exchange for up to $85 billion in loans. Lehman Brothers filed for Chapter 11 bankruptcy protection on Sept. 11.

After New York Attorney General Andrew Cuomo began making headlines last year for his investigation of companies involved in packaging mortgages into securities for sale to Wall Street investors, in January the FBI briefed reporters on its own probe of 14 companies in the financial services, mortgage lending and investment banking industry (see Inman News story).

In the past, the FBI’s mortgage fraud investigations mostly targeted borrowers who attempted to defraud lenders by inflating home prices.

In announcing the arrests of 406 people involved in 144 unrelated mortgage fraud cases from March to June, FBI Director Robert Mueller said the bureau indicted 321 people for mortgage fraud in 2007 and obtained 260 convictions (see story). Many of those cases involved mortgage fraud rings that used inflated appraisals and straw buyers to defraud banks and financial institutions, which reported 52,868 suspected cases of mortgage fraud in 2007.

Not wanting to be involved in financing “buy and bail” home purchases, the Federal Housing Administration will no longer count rental income when home buyers choose to vacate, rather than sell, their principal residence.

Home buyers seeking to rent out their existing home and buy another with an FHA-backed mortgage must now demonstrate they have sufficient income to pay both mortgages. The FHA won’t allow lenders to count rental income for the home being vacated unless borrowers have a 25 percent equity stake or can prove they are relocating for employment and obtain a one-year lease on the home being vacated.

The new rules are intended to prevent the practice known as “buy and bail,” where the buyer purchases a more affordable dwelling with the intention to cease making payments on the previous mortgage, FHA said in a letter spelling out the new guidance for lenders.

Because FHA will insure principal residences only, and not income properties, the property being vacated by definition could not have an FHA-insured mortgage. But if the property ended up in foreclosure, it might have an impact on the value of nearby homes with FHA-guaranteed mortgages, the administration said in justifying its actions.

The new rules took effect Sept. 19, and are temporary pending a determination whether a permanent rule change is needed. The rules apply only to a principal residence being vacated in favor of another principal residence, and not to existing rental properties disclosed on the loan application and confirmed by tax returns, FHA said.

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