Servicing

Under legislation now being debated on Capitol Hill, any financial institution headquartered in the United States can be a seller of mortgage-related assets to the Treasury, which will be the "market maker" and sole determiner of price. On Monday, Treasury and Bush administration officials continued their talks on an estimated $700 billion bailout of the capital and mortgage markets. Meanwhile, financial service executives were trying to figure out the most important part (for them) of the historic bailout plan: at what price will Treasury buy their troubled assets? "The biggest outstanding question is how the price of purchased assets will be determined," said Merrill Lynch analyst Akiva J. Dickstein in a new research report. "While the government will not purchase assets at par, the scope of the program plus the fact that the government is unlikely to demand the same yields as private sector purchases means that spreads are likely to tighten." As negotiations on the bill continue, there is talk that the Treasury might liberalize its guidelines and eventually become a purchaser of assets backed by credit cards, automobiles, and commercial real estate. Meanwhile, over the weekend, Goldman Sachs and Morgan Stanley -- the last two of the remaining independent investment banking giants -- said they would transform themselves into bank holding companies, a move that will allow them to accept more bank deposits but will subject them to greater regulatory scrutiny. Goldman owns Litton Loan Servicing, one of the largest "scratch-and-dent" servicers in the United States. Morgan owns Saxon Mortgage, which services $50 billion in subprime loans.

Fitch Ratings has placed Washington Mutual Inc., Seattle, which has been rumored to be on the auction block, on Rating Watch Evolving. Fitch attributed the action to "recent market developments," including the waiver by TPG Capital and related entities of price reset rights under an investment agreement (and related warrants) associated with their June 2008 investments. "Because the waiver removes an important potential hurdle to the sale of WaMu, Fitch believes it signals a much higher probability of an imminent transaction which, depending upon the buyer and the specifics of the transaction, could result in the upgrade or downgrade of [WaMu] and related subsidiaries," the rating agency said. Fitch can be found online at http://www.fitchratings.com.

Several companies -- VIST Financial Corp., Bank of the James Financial Group Inc., and Torchmark Corp. -- have announced that they will likely take impairment charges against their holdings of preferred stock in Fannie Mae and Freddie Mac. VIST, based in Wyomissing, Pa., said it held preferred stock in the government-sponsored enterprises with a total cost of $7.3 million as of June 30. The company said it expects to record a noncash other-than-temporary impairment charge of up to $7.3 million on the stock in the third quarter. Bank of the James Financial, based in Lynchburg, Va., reported that it held GSE preferred stock with a par value of $3.9 million as of Sept. 18, and noted that the shares were trading at less than 5% of par value. It estimated that it will take a noncash other-than-temporary impairment charge of $1.7 million to $1.9 million for the third quarter. Torchmark, based in McKinney, Texas, said it held about $2 million in GSE preferred stock, plus $207 million in the senior and subordinated debt of American International Group, Lehman Brothers, and Washington Mutual, as of Aug. 31. "In the unlikely event that the company determines the entire amount of these investments to be other than temporarily impaired, the after-tax impairment cost would be $136 million," Torchmark said. The companies can be found online at http://www.vistfc.com, http://www.bankofthejames.com, and http://www.torchmarkcorp.com.

Over 25% of mortgage delinquencies and foreclosures involve seniors, according to a study by AARP, and older homeowners with subprime mortgages are 17 times more likely to end up in foreclosure than their peers with prime mortgages. "The public perception is that older Americans are financially secure in their homes," said Susan Reinhard, director of AARP's Public Policy Institution. "But the reality is that while many are in fact secure, hundreds of thousands are not and face unsettling uncertainty over their futures as homeowners." The AARP study found that 28% of delinquencies and foreclosures that occurred during the second half of 2007 involved people 50 years and older. "Over 684,000 older Americans were either delinquent or in foreclosure at the end of 2007," the study says. "Of these, nearly 50,000 were in foreclosure or had already lost their homes." The study also picked up disparities between minorities and whites. Foreclosure rates for senior African-American and Hispanic homeowners were 0.51%, compared with 0.19% for senior Caucasians. African-Americans seniors hold over 6.8% of first mortgages in this age group, but represent 14.4% of the foreclosures among seniors.

The Securities Investor Protection Corp., which maintains a special fund to help investors at failed brokerage firms, has announced that it will file a proceeding placing Lehman Brothers Inc. in liquidation. After "extensive discussions and consultation" with representatives of the firm and its parent company, as well as representatives of the Securities and Exchange Commission, the Federal Reserve, and other federal agencies, SIPC said it has decided the action is "appropriate for the protection of customers" and to facilitate the transfer of customer accounts and an orderly unwinding of the brokerage firm's business. A hearing on the sale of the business to Barclays Capital Inc. was scheduled for Sept. 19.

Efforts by House and Senate banking committee leaders to reach a deal on a flood insurance reform bill have reached an impasse, and they may settle for a simple seven-month extension of the National Flood Insurance Program. "I am disappointed that a permanent solution is not before us, but we can and should extend the program while we work on that final bill," said House Financial Services Committee Chairman Barney Frank, D-Mass. Rep. Frank has introduced a bill that provides for a seven-month extension. The current authority to run the NFIP expires Sept. 30. The House and the Senate have passed separate flood insurance reform bills. The House bill provides new coverage for wind damage, which has complicated negotiations.

Fannie Mae is increasing its net-worth requirements for approved seller/servicers to ensure that its business partners are capable of fulfilling their obligations, the company has announced. The secondary-market agency is also establishing new minimum capital requirements for banks, thrifts, and other customers. "Fannie Mae is imposing additional requirements to protect itself against the material and adverse impact of rapid declines in a lender's net worth," Fannie says in its announcement 08-23. Effective Dec. 31, the minimum net worth requirement is $1.6 million for approved seller/servicers add $2.5 million for new lenders seeking Fannie Mae approval, plus 0.25% of the outstanding principal balance of the lender's portfolio of loans serviced for Fannie. All approved lenders must meet the minimum $2.5 million net worth starting Dec. 31, 2009. "Approved seller/servicers will have until June 30, 2009, to comply with the increased lender's adjusted-net-worth requirement," Fannie says.

The idea of creating a Resolution Trust Corp.-like entity to invest in ailing mortgage-related assets has been floating around the Treasury Department since January. One adviser familiar with the plan said former Treasury Undersecretary Robert Steel (who recently became the head of Wachovia Corp.) was instrumental in developing the idea. National Mortgage News reported on the existence of the plan in a Web column in January. However, back then the Treasury Department was not openly acknowledging that it even had a plan, much less one shaped after the RTC. The adviser, requesting anonymity, said the Treasury was hoping it would never have to use it. The RTC was created by Congress in 1989 to manage and sell billions of dollars in real estate, loans, and other assets belonging to failed thrifts. Eventually the agency was merged into the Federal Deposit Insurance Corp. Like Treasury Secretary Henry Paulson, Mr. Steel is an alumnus of Goldman Sachs. Mr. Steel became under secretary for domestic finance in October 2006. He retired as vice chairman of Goldman in 2004. He started with the firm in 1976.

The Treasury Department is readying a legislative proposal to purchase illiquid mortgage assets from financial institutions -- and will significantly boost its MBS purchase program to provide immediate support to the mortgage market. Late Thursday, Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben S. Bernanke met with congressional leaders to discuss creation of a Resolution Trust Corp.-like entity to purchase problem mortgage assets. Legislation to make it happen could come early next week. Treasury and Federal Reserve officials and senior members of Congress have concluded that a more systematic approach to the nation's financial crisis is needed. At a news conference Friday morning, Secretary Paulson said he will propose a legislative package and work with members of Congress over the weekend to "flesh out the details." He did not provide specifics about the package, except to say the program will require hundreds of billions of dollars to remove the illiquid mortgage assets that are "weighing down our financial institutions and threatening our economy." Pressure to create an RTC-type entity to deal with the financial crisis has been building for several weeks. Meanwhile, Fannie Mac and Freddie Mac have been directed to increase purchases of their mortgage-backed securities. Treasury is doubling its MBS purchases this month from $5 billion to $10 billion. The agency unveiled its MBS program Sept. 7 when it placed the two government-sponsored enterprises into conservatorships.

The third-quarter Core Mortgage Risk Index, which forecasts the relative risk of residential loan delinquencies, stands 12% higher than it did a year ago, according to First American CoreLogic, Santa Ana, Calif. The risk index has risen for 11 of the late 12 quarters, the company said. "The CMRI is currently 55% above the base period of the first quarter of 2002, a period near the end of the last U.S. economic recession," said Mark Fleming, the company's chief economist. "Although significantly higher now than during this base period, the CMRI is likely to continue rising nationally over the next 18 months." Mr. Fleming said declining home prices are the "primary factor" in the most recent rise in mortgage risk. CoreLogic, a provider of mortgage risk assessment and fraud prevention systems, can be found on the Web at http://www.facorelogic.com.