Focus Shifts to Credit as Lenders Look Back on First Quarter

It May not have been the best of times, but it certainly wasn't the worst of times either when big mortgage companies reported results for the first quarter.

None of the nation's biggest servicers saw the valuation of their mortgage servicing asset push them into the red during the first quarter. A fairly stable rate environment helped in that regard. According to Freddie Mac, the average 30-year mortgage rate was 6.16% in March, up just two basis points from 6.14% in December of last year.

But while rate stability helped, mortgage bankers couldn't escape the impact of turmoil in the subprime home loan industry. Many took charges against their residual interests in subprime assets that have been securitized or reported higher delinquencies on portfolio loans.

Countrywide Financial Corporation serviced 8.4 million mortgages, accounting for 13% of home loans outstanding at March 31, as the company continued to accrue market share in both origination and servicing.

Countrywide's chairman and CEO, Angelo Mozilo, said first-quarter performance suffered from charges related to subprime lending, higher loss reserves and asset valuation adjustments related to higher delinquencies, and softer housing markets.

Countrywide said its loan servicing sector lost $69 million in the first quarter, reflecting a downward valuation adjustment, and its impairment charges totaling $429 million against retained interests wiped out earnings from the servicing segment.

Like just about everyone else in the industry, Countrywide said it has changed policies and product guidelines to reduce its future exposure to deterioration in subprime credit quality.

Countrywide said credit costs increased outside of the subprime sector as well. The company described $132 million in additional credit costs, which reflected rising delinquencies and weaker housing markets. Most of the deterioration - accounting for $119 million of the credit hit - came from the impairment of Countrywide's retained interest in prime-quality home-equity loans. Countrywide said it has not seen any deterioration in the performance of its alt-A loans.

The delinquency rate on the servicing portfolio stood at 4.39% as of March 31, down from 5.02% at the end of 2006.

Washington Mutual Chairman and CEO Kerry Killinger highlighted his company's effort to reemphasize prime credit quality lending, saying that subprime home loans accounted for just 6% of WaMu's assets at the end of the quarter.

WaMu said that more than 7% of its subprime loans were nonperforming, up from about 5% a year earlier. The company defines nonperforming as loans that are 90 or more days overdue. In the company's earnings conference call, executive vice president and CFO Tom Casey said that while delinquencies have risen sharply, the charge-off rate for subprime loans has not spiked, and WaMu is working with troubled borrowers and "making accommodations" when possible to minimize losses.

In part, WaMu's efforts to scale back its exposure to certain aspects of the home loan market are illustrated by the contraction in its servicing portfolio. WaMu serviced $709 billion of home loans as of March 31, down from $830 billion one year earlier.

Even Wells Fargo, Like Countrywide a trillion dollar mortgage servicer, saw its sails trimmed by the weakening subprime mortgage market in the first quarter. In a recorded message for investors, chief financial officer Howard Atkins said Wells Fargo's actions to mitigate subprime exposure have included reducing the value of all nonprime loans in the company's mortgage warehouse and adding to the provision for early payment defaults on previously sold subprime loans. The company has also tightened underwriting of subprime loans.

"A small portion of the mortgage loans sold are subject to early payment default risk. In the first quarter we provided $46 million for estimated early payment default on all previously sold mortgages," Mr. Atkins said.

Those were among the actions that trimmed revenue by $90 million in the first quarter in response to the subprime mortgage market's deterioration. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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