Servicing

The agencies have been eyeing the possibility of creating a to-be-announced market for adjustable-rate mortgages, a Freddie Mac executive has told attendees at the Mortgage Bankers Association's National Secondary Market Conference in San Francisco.A TBA ARM market is likely to be among the main issues in the mortgage market over the next decade, said Mark Hanson, vice president of mortgage funding at Freddie Mac. He said the agencies "have really missed out" so far on ARM market share. But it is a market that Freddie Mac "very much wants to pursue," Mr. Hanson said. While speaking as part of a conference panel on "Ten Years of Change" in the mortgage capital markets, he also expressed faith in the strength of the existing fixed-rate TBA market, which has been threatened somewhat in recent times by increased specified pool trading. "It's so resilient," he said of the TBA mortgage-backed securities market, which has maintained the advantage of trading efficiently, generically, and in high volumes in ways specified pools do not.

Rising interest rates and home prices and a recently passed job creation act may spur a big increase in the issuance of home equity lines of credit in the residential mortgage-backed securities sector, according to Fitch Ratings."HELOCs were not able to be securitized using a REMIC structure, as each additional draw was considered a new loan prior to the passing of the American Jobs Creation Act of 2004, which went into effect Jan. 1 of this year," said Andrea Murad, a Fitch director. "The jobs act addresses the revolving nature of a HELOC that allows borrowers to draw on their lines, after the loan has been securitized." The analysis was published in the latest edition of Mortgage Principles and Interest, the rating agency RMBS newsletter. Fitch can be found on the Web at http://www.fitchratings.com

Freddie Mac has laid off 1,500 consultants -- or about 44% of its consulting team -- since last fall.The government-sponsored enterprise began hiring outside contractors in large numbers in 2003 in the wake of its $5 billion accounting scandal. These temporary employees have been assisting Freddie Mac in getting its books and accounting systems in order. However, the company also terminated the positions of about 10 full-time communications/marketing people as part of a "centralization" effort. (About 12 outside communications specialists also were let go.) A Freddie Mac spokeswoman stressed that the 10 on-staff workers were not let go for cause but were reorganized out of a job. She said Freddie's nonconsulting head count has remained steady.

Irwin Financial Corp., Columbus, Ind., has reported net income of $3.6 million ($0.13 per share) for the first quarter, compared with $14.4 million ($0.48 per share) a year earlier, a decline it attributed chiefly to a loss in its mortgage banking operations.The mortgage banking segment recorded a $9.6 million loss in the first quarter, compared with net income of $9.7 million in the first quarter of 2004, the company reported. "Like many in the industry, we have found it difficult to reduce the size of operations after the refinance boom of 2001-2003 in a rapid enough fashion to align with the reduced margins of the past several quarters," said Will Miller, Irwin Financial's chairman. He noted that interest rates had fallen rapidly, prompting Irwin to reposition its hedges, but then rebounded, driving the company's servicing values above the "lower of cost or market" cap under generally accepted accounting principles. "The economic value of our servicing rights continued to rise and would have offset the hedge losses had we been allowed to book the increase in value under GAAP," Mr. Miller said. The company can be found online at http://www.irwinfinancial.com.

The Federal Home Loan Bank of Seattle has hired Black Rock Financial and a firm headed by former Comptroller of the Currency Eugene Ludwig to assist it in getting its finances and management practices in order.According to officials familiar with the situation, Black Rock, including its managing director Peter Fisher, is helping the government-sponsored enterprise with its three-year business and capital management plan. (Mr. Fisher is a former top official at the Treasury Department.) Promontory Financial Group of Washington, Mr. Ludwig's group, is working on a review of the Seattle bank's management. The two firms, however, are not involved in an investigation of FHLBank stock sales by three depositories that may have redeemed stock based on nonpublic information they had access to. That review is being conducted by five nonmember directors with the assistance of an unidentified outside law firm. The Seattle GSE is forecasting possible losses for the next few years and recently disclosed a $260 million unrealized loss on its balance sheet.

The risk of a general decline in home prices over the next two years is highest in the Northeast and California, according to the latest PMI Risk Index.The average value of the index for the 50 largest metropolitan statistical areas stood at 202 in the latest quarterly index, up from its previous reading of 161, said PMI Mortgage Insurance Co., the Walnut Creek, Calif.-based mortgage insurer that created the index. The index value means that these MSAs have on average a 20.2% probability of experiencing a home price decline in the next two years. But for the MSAs topping the index, the risk is much higher. They are Boston-Quincy (Mass.), at 534; Nassau-Suffolk (N.Y.), at 511; and Oakland-Fremont-Hayward (Calif.), at 487. Fourteen of the 15 riskiest MSAs are in the Northeast or California. "The latest PMI Risk Index numbers reveal that most of the increase in house price risk is concentrated in certain markets, caused by regional weakening in affordability," said Mark Milner, chief risk officer of PMI Mortgage Insurance. PMI can be found online at http://www.pmigroup.com.

The Department of Housing and Urban Development is increasing its fines on residential servicers that fail to engage in loss mitigation on federally insured residential loans.Under a regulation that goes into effect in late May, HUD can impose fines of up to three times the claim amount of the mortgage. In fiscal year 2003 the average Federal Housing Administration claim was $92,254, which means some fines could be as large as $276,000. Currently, the maximum FHA penalty is $6,500 for each violation -- or $1.25 million for all violations during any one-year period. Victoria Vidal, a senior director for the Mortgage Bankers Association, said the rule "is not one of our favorites" and that such harsh penalties could ultimately "push some firms away from doing FHA servicing." (See the May 2 issue of National Mortgage News for more details.)

One class from each of two deals originated by New Century Mortgage Corp. have been placed under review for possible downgrade by Moody's Investors Service.The negative watchlist placements were as follows: class B1, Morgan Stanley Dean Witter Capital I Inc., series 2001-NC1; and class B2, CWABS Inc., series 2001-BC1. In addition, Moody's placed 33 certificates from 18 deals originated by New Century under review for possible upgrade. The transactions, issued in 1999-2000, are backed by first-lien adjustable- and fixed-rate subprime mortgage loans. The classes placed on review for possible downgrade were watchlisted because credit enhancement is low given the projected losses on the underlying pools, the rating agency said. The deals have taken losses, and "pipeline loss could cause eventual erosion of the overcollateralization," Moody's said. The rating agency can be found online at http://www.moodys.com.

Countrywide Financial Corp., Calabasas, Calif., has reported consolidated net earnings of $688.9 million ($1.13 per share) for the first quarter, a 27% increase from $543.2 million ($0.90 per share) in the first quarter of 2004.Pretax earnings by the company's mortgage banking operations rose to $772 million from $561 million a year earlier. "Countrywide's heightened profitability was driven primarily by an increased contribution from the mortgage banking segment, where pretax earnings were up 38% from the same quarter a year ago and 196% from last quarter," said Angelo R. Mozilo, Countrywide's chairman and chief executive officer. Pretax earnings totaled $735 million in the mortgage production sector and $17 million in the servicing sector, where further improvement "was limited primarily by lower-of-cost-or-market accounting, as the market value for mortgage servicing rights increased by $168 million more than the increase in carrying value," the company said. Countrywide's servicing portfolio stood at a record $893 billion as of March 31, up $211 billion from that of a year earlier, the company reported. The company can be found online at http://www.countrywide.com.

The ratings of Doral Financial Corp., San Juan, Puerto Rico, have been placed under review for possible downgrade by Moody's Investors Service.Doral's senior debt is currently rated Baa2. The rating action came in the wake of Doral's announcement that it will restate past earnings to reflect impairments on its floating-rate interest-only strips. Moody's said Doral also intends to change its business model to retain a larger portion of its mortgage production and reduce its reliance on gains on the sale of floating-rate IOs. Moody's said it will assess the effect of such changes on earnings, evaluate Doral's interest-rate-risk management policies and practices, and review the company's revised IO evaluation methodology. The rating agency said it will also assess the potential impact of a recently announced regulatory investigation and a recently filed class action suit. Moody's said it "could not rule out the possibility of a multiple-notch downgrade because of the combination of challenges facing Doral." Moody's can be found online at http://www.moodys.com.