Servicing

The Office of Thrift Supervision seized control of Washington Mutual Thursday night and then handed the thrift over to the Federal Deposit Insurance Corp., which immediately sold the ailing servicing giant to JPMorgan Chase & Co. for $1.9 billion. The two parties -- which had been talking on and off about a deal over the past year -- agreed to terms after news reports began to surface that five mutual funds had formed a consortium to make a bid for WaMu. A handful of other bidders were looking at WaMu, a fact acknowledged by OTS Director John Reich, who noted that the pending $700 billion bailout of the industry affected the deal. "I think it was a significant distraction, and it probably played a role in the interest of some parties to decide not to make a bid," Mr. Reich said. The OTS said it closed WaMu Thursday because of a run on its "jumbo" deposits, particularly in California. WaMu had loan concentrations in California and Florida, which have the nation's highest foreclosure rates. "WaMu was a victim of one of the worst downturns in the housing market," said the OTS chief. The S&L is the nation's fifth-largest residential servicer, with $600 billion in housing receivables. It is also the nation's largest S&L, with $307 billion in assets.

The residential servicer ratings of Irwin Home Equity Corp., San Ramon, Calif., have been downgraded by Fitch Ratings and placed on Rating Watch Evolving. Irwin's primary servicer ratings for high loan-to-value and home equity line-of-credit products were downgraded from RPS2-minus to RPS3-plus. Fitch also assigned Irwin an RPS3-plus primary specialty servicer rating for second-lien product. The rating actions were based on "the continued financial pressures faced by IHE's parent, Irwin Financial Corp., reflecting the difficult operating environment which has severely affected IFC's earnings, asset quality, and financial flexibility," Fitch said. The rating agency can be found online at http://www.fitchratings.com.

Moody's Investors Service has downgraded the servicer quality rating of GMAC ResCap as a master servicer from SQ2 to SQ2-minus. The rating remains on review for possible further downgrade. Moody's said the downgrade reflects increasingly difficult market conditions that are putting stress on the servicing operations. While the master servicing operations have remained profitable, Residential Capital LLC (which houses the GMAC ResCap master servicing operations) and GMAC "continue to be under significant financial pressure," the rating agency said. On Sept 2, GMAC and ResCap announced plans to significantly downsize the ResCap operations. The ratings of both companies remain under negative outlook. As GMAC ResCap continues to reduce staff and outsource master servicing functions to cut costs, Moody's said it is "uncertain about GMAC ResCap's willingness and ability to continue investing in the platform." The rating agency can be found online at http://www.moodys.com.

The possibility of a partial sale of Washington Mutual Inc. has prompted downgrades of WaMu by Standard & Poor's Ratings Services and Fitch Ratings. S&P downgraded WaMu's counterparty credit rating from BB-minus/B to CCC/C, though it affirmed the BBB/A-3 counterparty credit rating on Washington Mutual Bank, citing "the breadth of its retail franchise." S&P attributed the downgrade to "the increased likelihood that a potential sale of the company may not involve the whole company, which increases the risk of default for holding company creditors." Fitch downgraded WaMu's long-term Issuer Default Rating from BBB-minus to B-minus and placed the company and its subsidiaries on Rating Watch Evolving, citing "the heightened uncertainty associated with WaMu's debt obligations in light of the difficult market conditions and increasingly limited options to bolster capital." A partial sale "would likely be detrimental to WaMu's holding company creditors and potentially to unsecured debtholders at the bank level because they are effectively subordinated to depositors and the considerable amount of secured financing," Fitch said.

Some 302,593 mortgages backed by Fannie Mae and Freddie Mac (1% of all the notes they guarantee) are 90 days or more past due, placing them in the "seriously delinquent" category. According to new figures released by the Federal Housing Finance Agency, Fannie and Freddie together have 30.4 million loans in their guarantee portfolio. In testimony Thursday before the House Financial Services Committee, Freddie Mac's new chief executive, David Moffett, said his company has increased the financial incentive it pays seller/servicers to participate in a new Mass Modification program for troubled borrowers. Mr. Moffett maintains that the company will help 82,000 borrowers avoid foreclosure this year.

House and Senate Democrats have agreed on most details of a $700 billion bailout plan for the credit and mortgage industries, including a provision that will allow bankruptcy judges to reduce ("cram down") the outstanding balance on troubled mortgages. The cramdown proposal is vehemently opposed by the mortgage banking industry. As of MortgageWire's deadline, Democrats were meeting with Republicans on the legislation. Among other things, the Democratic version of the bill would allow the Treasury to spend an unspecified portion of the money prior to going before an oversight board for further spending allowances. The money will be used to buy troubled mortgage-backed securities from financial service companies (including depositories) of all sizes. Republicans and the White House support Democratic language that would limit compensation for executives whose firms sell into the program.

The master servicer rating of The Bank of New York Mellon has been upgraded from RMS2-plus to RMS1-minus by Fitch Ratings. Fitch attributed the action to BNYM's "strong oversight and monitoring of its primary servicers, its continued investment in enhancing its technology, and its increasing use of automation." The company's master servicing operation is based in New Albany, Ohio. Fitch rates residential servicers on a scale of 1 to 5, with 1 being the highest rating. The rating agency can be found online at http://www.fitchratings.com.

Nominal home prices were down 10.9% nationally in July from the level recorded a year earlier, according to the latest LoanPerformance Home Price Index. Los Angeles-Long Beach-Glendale topped the index's list of statistical areas experiencing 12-month home price declines, recording a 27.95% decrease. Oakland-Fremont-Hayward (Calif.) ranked second with a 27.28% decline, and Riverside-San Bernardino-Ontario (Calif.) finished third at 26.93%. "The recent price trend is similar to the Massachusetts and Texas house price declines in the 1980s and 1990s that took approximately two years to bottom out," said Mark Fleming, chief economist of First American CoreLogic, the Santa Ana, Calif.-based company that compiles the index. "In both cases there was stabilization in the rate of decline before the lengthy recovery in price levels." The LoanPerformance HPI provides monthly home price indices and median sales prices covering 7,575 ZIP codes and 676 counties in all 50 states and the District of Columbia, the company said. First American CoreLogic can be found online at http://www.facorelogic.com.

In a battle that has national implications, a Miami Beach city commissioner is taking on condominium lenders in Florida who don't pay what he says is their fair share of condo assessments. Jerry Libbin has formed a coalition of unit owners to lobby state legislators to force banks to pay the full assessment on units that have been taken back from borrowers. Under current law, lenders need pay only 1% of the normal fee once they foreclose on a unit. But Mr. Libbin says some banks don't even do that, and many associations have to sue lenders to recover their unpaid assessments and late fees. Worse, the Miami Beach commissioner maintains, other owners are forced to pay more than they otherwise would so they can maintain their buildings. "Banks are taking unfair advantage of condo owners who have done absolutely nothing wrong," he said. "We must stop this vicious cycle." With 23,631 associations governing a total of 1.4 million units, according to the state's business department, Florida has perhaps the greatest concentration of condos in the country. In Miami-Dade County alone, there are 4,045 buildings with 242,352 units.

In the long term, the proposed RTC-like government entity slated to buy illiquid assets appears likely to produce fundamentals that may boost mortgage-backed securities prices dramatically, according to a group that has managed investments in distressed residential MBS since late last year. The management group of Team Nation Investment Group LLC, Irvine, Calif., said they do not expect to see a significant change in MBS pricing in the short term. But even before official plans were made for the Resolution Trust Corp.-like entity, they said they were able to produce an average 31.6% return on investment on their distressed RMBS holdings since November 2007. Several market participants have shown concern about the integrity of MBS in the wake of greater-than-expected losses that have shaken the confidence of the financial markets at large. But Team Nation Investment Group fund manager Craig Chang said he believes that "with the recent government action, it further justifies that MBS are an instrument that the government believes is as important to our economy as the U.S. dollar -- it is a part of our lives."