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Flagstar Pays for Change in MSR Accounting

Flagstar Bancorp lost $10.6 million in the first quarter as a change in accounting for mortgage servicing rights and higher credit costs damaged the company's results.

Still, the first-quarter loss was an improvement from the fourth quarter, when Flagstar lost $30.1 million.

Flagstar's credit costs increased as the company recorded a $34.3 million provision for loan losses in the first quarter.

Mark Hammond, Flagstar's president and CEO, said the company's operating metrics are improving better than expected in some areas, with improvements in net interest margin, loan production and gain-on-loan-sale margin.

Flagstar switched to fair value accounting for the fast majority of its mortgage servicing rights portfolio in the first quarter, contributing to a loss of $17 million related to loan administration. Prior to 2008, Flagstar had accounted for the MSR asset using the amortization method. Fair value essentially requires the bank to mark-to-market the value of its MSRs on a quarterly basis.

The company said had it used the amortization method, its MSR earnings would have been $617,663 in the first quarter.

Flagstar serviced $38.4 billion of home loans at the end of the first quarter, nearly double the volume of loans serviced a year earlier. The MSR portfolio had a weighted average servicing fee of 35 basis points. Flagstar valued its MSR asset at $498 million as of March 31.

Mr. Hammond said Flagstar's capital ratios "are consistent with our historical norms and we believe they are appropriate given the composition of our balance sheet."

However, he added that Flagstar expects to pursue opportunities to increase both core capital and risk-based capital.

Flagstar's residential loan production increased by 38% from the first quarter of 2007 to $8 billion in the first quarter of this year, with residential home loans accounting for almost all of the volume.

Analysts at Friedman Billings Ramsey maintain a neutral rating and $7 price target for Flagstar, calling the first-quarter results "noisy." FBR noted that Flagstar's credit trends continued to deteriorate, with nonperforming loans rising to 2.96% of the bank's portfolio.

"The recession environment in the company's home market and weakening housing market in many parts of the country will put significant pressure on FBC's earnings throughout 2008," FBR analyst Paul Miller said in a report. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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