Servicing

The Federal Home Loan Bank of Chicago has notified its members that it will not pay a dividend in the third quarter due to declining earnings and a possible loss in the fourth quarter."We expect that certain factors will significantly lower our future net income and we may experience losses in the fourth quarter and 2008," the FHLBank says in a securities filing. In the second quarter, the Chicago bank reported that earnings fell by 55%, to $50 million, compared with the level of a year earlier. The bank incurred a $13 million loss on its $36.4 billion mortgage portfolio, which had boosted earnings by $84 million in the second quarter of 2006. The Chicago bank had been operating for the past three years under a supervisory agreement that was recently replaced with a cease-and-desist order by the Federal Housing Finance Board.

The stocks of Irwin Financial Corp. and Flagstar Bancorp Inc. were trading lower Wednesday morning after both firms reported third-quarter losses related to home loans.Irwin lost $18 million, including "discontinued operations," in the third quarter, compared with net income of $5.5 million in the second quarter. Chairman and chief executive officer Will Miller said the "mortgage crisis continued to take a heavy toll on our results." Irwin significantly increased its reserve in the third quarter for future home equity losses. Flagstar Bank, which reported a $32.1 million loss for the third quarter, said a decrease in gains on the sale of mortgage servicing rights, losses on loan sales, and an increase in the provision for loan losses was responsible for the downturn. The companies can be found online at http://www.irwinfinancial.com and http://www.flagstar.com.

A law firm that represents shareholders who lost millions by investing in two subprime-related hedge funds managed by Bear Stearns & Co. is calling for a vote to replace Bear as the manager of what's left of the funds.A spokesman for the law firm of Reed Smith LLP said, "The two funds are worthless. The idea is to take over management of them and do a forensic accounting to see what happened. Bear's view is that it's not responsible for what happened and that shareholders are out of luck." The two funds -- one for U.S. investors, the other for overseas investors -- had an equity value of $650 million at one time. Bear Stearns could not be reached for comment at deadline time. Investors have already filed class-action lawsuits against Bear in regard to their losses. Reed Smith, though, is not a party to those suits. Bear Stearns can be found online at http://www.bearstearns.com.

House Financial Services Committee Chairman Barney Frank, D-Mass., wants to start the mark-up of his controversial predatory-lending bill on Nov. 6.The Mortgage Reform and Anti-Predatory Lending Act would establish a minimum federal lending standard (but not pre-empt state lending laws) along with a limited form of assignee liability for securitizers of subprime mortgages. The bill (H.R. 3915), co-sponsored by Reps. Brad Miller and Mel Watt, both North Carolina Democrats, also appears to ban the payment of yield-spread premiums to mortgage brokers. The National Association of Mortgage Brokers is seeking a clarification to this anti-steering provision.

A properly designed bankruptcy bill with firm guidance for modifying loans could reduce the number of expected foreclosures by 500,000, Mark Zandi, chief economist of Moody's Economy.com, has told a congressional panel.Mr. Zandi warned that 2 million families could lose their home by early 2009 and that the current cycle of rising foreclosures and falling housing prices could lead to a national recession. "There is no more efficacious way to short-circuit this cycle than by adopting legislation to allow bankruptcy judges the authority to modify first mortgages by treating them as secured only up to the market value of the property," he testified. He suggested that this legislation should sunset after three years so Congress can review its impact. But he dismissed claims by the Mortgage Bankers Association that such a bankruptcy bill would force lenders to increase mortgage rates and fees [see item above]. And the founder of Economy.com testified that current voluntary efforts by mortgage servicers to modify loans is unlikely to stop the increase in foreclosures. The Moody's dot-com can be found online at http://www.economy.com.

If bankruptcy judges begin to reduce or "cram down" the principal amount of residential mortgages, Federal Housing Administration servicers would have to absorb the losses because the government cannot pay a claim on a cramdown, according to the Mortgage Bankers Association.Passage of the bankruptcy bill (H.R. 3609) to permits cramdowns and loan modifications would make it riskier for lenders to originate FHA-insured and Department of Veterans Affairs-guaranteed loans, MBA chairman-elect David Kittle warned a House Judiciary Committee panel. As a result, lenders would have to charge higher interest rates and fees. The MBA also noted that Fannie Mae and Freddie Mac would be required to purchase loans out of mortgage-backed securities pools if loans are modified. "If this bill becomes law, we believe mortgage rates would jump significantly, going up 1 1/2 to 2 points for everyone taking out a loan," Mr. Kittle told the commercial and administration law subcommittee. The association can be found on the Web at http://www.mortgagebankers.org.

Fitch Ratings also downgraded and withdrew five classes of notes from two Westways mortgage market value collateralized debt obligations.The downgrades were as follows: Westways Funding VII Ltd., class LD loan interests, from CC/DR5 to C/DR2, and income notes, from CC/DR6 to C/DR6; and Westways Funding VIII Ltd., class D, from CC/DR5 to C/DR5, class LD, from CC/DR5 to C/DR5, and income notes, from CC/DR6 to C/DR6. Both transactions had failed overcollateralization tests, and their portfolios were liquidated, Fitch reported. The asset portfolios contained floating-rate mortgage-backed securities, and agency securities constituted over half of each portfolio.

Fitch Ratings issued a flurry of rating actions Oct. 29 that included downgrades of 51 classes of mortgage-backed securities.Fitch also placed seven classes of MBS on Rating Watch Negative and affirmed the ratings on 67 classes. Among the securities affected by the downgrades were: 26 classes from six issues of Structured Asset Investment Loan mortgage pass-through certificates and 14 classes from three issues of Amortizing Residential Collateral mortgage pass-throughs. The negative rating actions were attributed chiefly to a deterioration in the relationship between credit enhancement and loss expectations, although one was linked to changes in Fitch's subprime loss forecasting assumptions. The rating agency can be found online at http://www.fitchratings.com.

The default rate on subprime mortgage loans jumped nearly 150 basis points in August to a record high of 16.1%, and the foreclosure rate jumped 82 bps to 6.8%, as declining house prices began to take their toll on credit performance, according to a Friedman Billings Ramsey Investment Management report.Michael Youngblood, FBRIM's managing director of fixed-income research, notes that falling house prices are becoming a factor in the latest surge in subprime defaults. The researcher points out that 49 metropolitan statistical areas in six states, representing 46% of all subprime loans, have experienced a 200% or more increase in defaults since August 2006. "Furthermore, we count 43 housing price bubbles in these 49 MSAs, whereas we count only 69 house price bubbles in all 363 MSAs," Mr. Youngblood says in the report. The report also indicates that the default rate on alternative-A loans jumped 62 bps to 3.96% in August, and the foreclosure rate rose 41 bps to 1.96%. (The default rate includes loans 90 days or more past due, in foreclosure, and real estate owned.)

Office of Thrift Supervision economists see a "high" probability of continued housing market deterioration, along with rising foreclosures and house price declines, according to the premier issue of the agency's Monthly Market Monitor."The probability of further deterioration in housing conditions remains high, leaving asset prices vulnerable to more declines and credit spreads susceptible to greater widening," the OTS report says. The monthly report also seems to warn thrifts that they could be facing a "prolonged" correction in the housing market. "Contributing to the malaise is higher mortgage rates and tighter credit conditions as lenders, saddled with loans on balance sheets, have fewer funds to lend and less desire to extend credit to other-than-prime borrowers," the Oct. 26 monitor says.