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News Analysis: B&C Woes Spreading

The meltdown in the subprime sector is casting a gray cloud over the A- to D servicing market. As Mortgage Servicing News went to press last month, the sector's liquidity crisis - and related woes - was endangering the stability of $391 billion in receivables, or 25% of the subprime market, according to an analysis conducted by this publication.

The receivables belong to six struggling subprime servicers - Ameriquest, Fremont General, Homecomings, HSBC Finance, Mortgage Lenders Network and Option One, some of which are currently for sale. (See table.)

At least two of these firms - MLN of Connecticut and New Century - are in bankruptcy or soon will be. Among subprime servicers, New Century ranks 14th, MLN 20th.

In some cases, when a servicer files for bankruptcy protection, the end investor in the loans pulls the servicing rights, handing over the task to an interim servicer.

In the process of changing servicers, performing loans can sometimes go into default erroneously because of lost files or mistaken information.

At press time, New Century Financial Corp., Irvine, Calif., was on the verge of filing for bankruptcy protection after Morgan Stanley pulled a $265 million line of credit from the lender/servicer.

In a public filing, NCFC also revealed that several of its financiers - Bank of America, Citigroup, Credit Suisse, Deutsche Bank - had declared the non-depository in default on warehouse lines or other financial obligations.

Documents show that NCFC owes Credit Suisse almost $1 billion due to a repurchase obligation. Meanwhile, some Wall Street firms are terminating NCFC's servicing rights, which could reduce cash flow at the company's servicing unit.

MLN is already in bankruptcy and the future of that firm's $17 billion portfolio is in doubt.

The nation's No. 3 and No. 5 ranked subprime servicers - Option One and Ameriquest - are currently for sale. Citigroup has an option to buy Ameriquest's $65 billion portfolio. (Fremont's B&C business also is up for grabs.)

Option One's parent, H&R Block, has said there are about four parties interested in buying OOMC and its $69 billion portfolio but has yet to provide any names.

As for Homecomings, the wholesaler/servicer's parent company, GMAC Mortgage, has delayed releasing fourth-quarter results and according to Lehman Brothers may take a $1 billion hit from delinquent mortgages.

Then there's HSBC Holdings of London. Hammered by losses on its American subprime business (HSBC Finance of Illinois) the mega-bank is contemplating unloading some of it's A- to D loans which total in the billions, investment banking sources told MSN.

HSBC's bank affiliate, meanwhile, plans to stop providing warehouse financing on subprime mortgages, sources said. A bank spokeswoman declined to discuss both matters, citing company policy "not to comment on speculation."

One warehouse executive said, "A client of ours was told by HSBC they are exiting the business and ending their relationship." Two bidders of nonperforming product said they have already approached HSBC about buying its subprime holdings - but at a discount.

According to the Quarterly Data Report, HSBC Finance services about $50 billion in subprime loans. Some of the mortgages are on the balance sheet of the bank.

In February, London-based HSBC Holdings said writedowns and expected losses on adjustable-rate second-lien subprime loans sparked it to increase the bad debt reserve on its B&C division to $10.56 billion, a stunning 125% increase from its Sept. 30 figure. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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