Servicing

Standard & Poor's Ratings Services has downgraded its counterparty credit rating and senior unsecured debt ratings on WaMu from CCC to D. S&P also downgraded its subordinated debt and preferred stock ratings on WaMu from CC to D. JPMorgan Chase & Co. (rated AA-minus/Negative/A-1-plus by S&P) has agreed to acquire all of Washington Mutual Bank's deposits, so the rating agency said it has upgraded the uninsured deposit rating on WaMu Bank from BBB-minus/A-3 to AA-minus/A-1-plus. However, JPM did not acquire the bank's senior and subordinated debt, so those debts reside in the Federal Deposit Insurance Corp. receivership, S&P noted. Therefore, the counterparty credit rating on WaMu Bank was downgraded from BBB-minus to R and the senior unsecured debt and subordinated debt ratings on the bank were downgraded from BBB-minus and BB-plus, respectively, to D, signifying regulatory intervention. "These rating actions stem from the bank's placement in FDIC receivership and its simultaneous sale to JPM," explained S&P credit analyst Victoria Wagner. "As a result of the bank's receivership status, we expect the holding company to file bankruptcy."

While the conforming loan limit will fall back to $625,500 in high-cost areas beginning Oct. 1, the new ceiling will be the same for all of Freddie Mac's customers. At least that's the plan, according to Patricia McClung, who is responsible for the initiation and deployment of all single-family product offers at the company. "We're still working out the details," Ms. McClung said at the recent New England Mortgage Bankers Conference in Newport, R.I. "But our plan is to make it available to all our customers -- cash window, guarantor, and multilenders alike." The Freddie Mac executive also assured a standing-room-only session that her company and its chief rival, Fannie Mae, "are still here to keep markets liquid." She said a major reason the two companies were taken into receivership three weeks ago is that they are "so vital to the business that we need to be successful." Jennifer Whip, vice president of marketing in Fannie Mae's Eastern region, also addressed the concerns of nervous lenders, who packed the room to hear what lies ahead for the two mortgage giants. "We're here to work with you," she told the group. "Tough as it is, this is the market Fannie Mae was created to serve."

By purchasing Wachovia Corp., Citigroup -- which is receiving federal aid on the deal -- will pick up additional market share in both residential lending and servicing, challenging Bank of America, Chase, and Wells Fargo for the top perch in the industry. Among servicers, Wachovia had a 2.09% market share. In lending, Wachovia's share was much higher -- 3.89%. When the dust settles from the recent spate of acquisitions, the mortgage industry will have four $1 trillion-plus servicers: Bank of America ($2.09 trillion), Wells Fargo ($1.50 trillion), Chase ($1.45 trillion), and Citigroup ($1.02 trillion). Early Monday morning the Federal Deposit Insurance Corp. announced that Citigroup would buy the ailing Wachovia through an "open bank transaction" in which no federal money will be provided at first but the agency is potentially on the hook for Wachovia's mortgage losses -- most of which are tied to risky payment-option adjustable-rate mortgages. By agreeing to buy Wachovia, Citigroup will absorb the first $42 billion in losses on a $312 billion pool of loans. "The FDIC will absorb losses beyond that," the agency said in a statement. To compensate the government for bearing the risk of potential losses, the FDIC was given $12 billion worth of Citigroup preferred stock and options.

The $700 billon emergency bailout bill Congress is trying to pass this week includes several fixes for a special Federal Housing Administration refinancing program to make it more attractive for lenders to help troubled homeowners and easier to pay off second lienholders who may be blocking a restructuring. Under the Hope for Homeowners program, lenders refinancing borrowers are expected to write down the mortgage to a 90% loan-to-value ratio based on a recent appraisal. The bailout bill gives the program oversight board the discretion to raise the maximum LTV to a higher percentage, possibly to 95%. "This is definitely a positive step that will make the program more attractive to lenders," said mortgage banking consultant Brian Chappelle. The bill also allows the oversight board to use the proceeds from Hope bonds to pay off second lienholders who are blocking a restructuring of the first mortgage. Currently, the lender can only offer second lienholders a share of future appreciation in the property. The Department of Housing and Urban Development is expected to issue guidelines for the Hope program Oct. 1, as required by the housing bill Congress passed their summer.

The Treasury Department must disclose within two days the price it pays for any mortgage asset, according to the pending $700 billion bailout bill. The Emergency Economic Stabilization Act mandates that the Treasury must provide to the public (in an electronic form) the dollar amount of the assets sold, the price, and a description of the collateral being purchased. The Treasury also wants any firm that gives the government warrants to guarantee that its holdings will not be diluted by stock splits.

After consistently climbing by large percentages, the number of foreclosure deeds filed in Massachusetts fell 2% in August from the level recorded a year earlier, according to The Warren Group, publisher of Banker & Tradesman. There were 998 foreclosure deeds recorded in August, down from 1,018 in August 2007, the company reported. However, year-to-date foreclosure activity has surged in Massachusetts. A total of 8,804 foreclosure deeds (the final step in the foreclosure process) were filed in the first eight months of the year, up 79% from 4,920 in the same period of 2007. Foreclosure petitions (the first step in the process) have risen in the past two months after a temporary lull that started in May due to state legislation requiring lenders to give homeowners 90 days to cure mortgage defaults. A total of 943 foreclosure petitions were filed in August, an 87.8% jump from 502 in July but 69.7% lower than the 3,112 filed in August 2007. The company can be found online at http://www.thewarrengroup.com.

Boston Private Financial Holdings Inc., Boston, has announced its intention to sell substantially all the land and construction loans at its Southern California private banking affiliate, First Private Bank & Trust. The portfolio consists of 72 loans with a book value of approximately $250 million as of June 30, the company said. "While the final sale price has not yet been determined, First Private is expected to take an after-tax loss of between $70 million and $85 million for the quarter ending Sept. 30, 2008, which reflects the current estimate of the price for these assets," Boston Private Financial said.

Freddie Mac sold off $32.5 billion in mortgage assets in August before it was placed into conservatorship by regulators and reduced the size of its mortgage portfolio, according to a monthly summary of its business activity. Overall, the secondary-market agency, which is supposed to provide liquidity to the mortgage market, reduced its portfolio by $37.3 billion in August to $760.9 billion. Freddie also reported that it guaranteed $22.0 billion in mortgage-backed securities in August, down from $35.4 billion a year earlier. Ginnie Mae guaranteed the issuance of $28.8 billion in MBS in August. The summary also shows that the serious delinquency rate on Freddie's single-family mortgages rose 10 basis points in August to 1.11%. The percentage of Freddie loans that were 90 days or more past due stood at 0.46% in August 2007.

Republican congressmen are balking at supporting President Bush's $700 billion plan to exorcise bad mortgage debt from the financial system, which could jeopardize efforts to pass the emergency legislation before the election. House Financial Services Committee Chairman Barney Frank, D-Mass., has warned that Democrats are not going to pass the president's plan without Republican votes. Democratic leaders thought they had an agreement with Republican leaders on the parameters of the $700 billion bailout bill following a closed-door meeting on Thursday. But it became clear at a subsequent White House meeting that House Republicans were not on board. A group of conservative Republicans are pushing an alternative under which the government would insure mortgage-backed securities so the banks could sell them to investors. Democrats have called it "unworkable." At the urging of President Bush, key congressional leaders resumed negotiations on Friday. The president's proposal to purchase troubled mortgage assets from banks remains the centerpiece of the talks. House Financial Services Committee chairman Barney Frank, D-Mass., said he is willing to attach the Republican MBS insurance proposal to the bill to get bi-partisan support. Negotiations will continue over the weekend and Rep. Frank said he is confident they can reach an agreement on Sunday.

Key to JPMorgan Chase & Co.'s ability to take over Washington Mutual is a dramatic, $30 billion proposed writedown of WaMu's home loan portfolio, far in excess of the remaining loss rate WaMu had earlier projected on the portfolio. In addition, JPMorgan expects to write down other assets in WaMu's overall portfolio by about $1 billion. JPMorgan Chase has already unveiled plans to raise $10 billion in capital related to the acquisition of WaMu's $307 billion in assets. JPMorgan Chase priced an offering of approximately 247 million common shares at $40.50 per share Friday morning, with an option to sell up to an additional 37 million shares. WaMu's assets included $176 billion of residential mortgage loans. As of June 30, when the mortgage portfolio was slightly larger, payment-option adjustable-rate mortgages accounted for $52.9 billion of that total. Subprime mortgages accounted for $16 billion. WaMu's home loan portfolio also included $60.4 billion of home equity products.