Servicing

Terry Klein, the former head of First Nationwide Mortgage who now works as an industry consultant, says mortgage companies could live to regret reducing mortgage servicing fees the next time a real estate recession surfaces.Mr. Klein told the Mortgage Bankers Association's National Mortgage Servicing Conference in San Diego that he is skeptical of proposals that would reduce fees to the current operational cost of servicing a loan. He pointed out that the subprime credit lending industry has never been stress-tested by a real estate downturn. As a result, the impact on delinquencies and defaults -- and the cost of managing those problems -- is not fully known. Mr. Klein acknowledged that several trends have reduced servicing costs and could justify a lower fee. Advances in technology have improved servicing efficiency, and higher average loan balances have increased the dollar size of the servicing fee, which is typically expressed as a percentage of the loan. Mr. Klein said reducing servicing fees too much could front-load profits before the work of managing the loans is actually performed. "If real estate values stop growing, the game changes," he noted. "I think we should be careful about reducing the servicing fee."

Lenders would benefit from a national regulation governing abusive lending claims that pre-empts state and local laws, according to the chairman of the Mortgage Bankers Association's loan servicing committee.Robert Caruso, executive vice president at Wells Fargo Home Mortgage, told attendees at the MBA's National Mortgage Servicing Conference that already there are concerns that the Office of the Comptroller of the Currency's decision to pre-empt local lending laws may create a competitive advantage for national banks and their mortgage subsidiaries. He also said the OCC ruling raises questions for loan servicers, such as whether the pre-emption extends to loans subserviced by another party. He urged MBA members to advocate national rules governing predatory lending issues. "We don't need to take players out of the industry because of bad legislation," he said at the conference's opening session. The MBA can be found online at http://www.mortgagebankers.org.

Option One Mortgage Corp., Irvine, Calif., has announced updated best practices for its wholesale and retail loan origination businesses and its mortgage servicing operation.Option One said it revised and updated its best practices to make the information more accessible to borrowers. One practice touted by the company is the establishment of escrow accounts so borrowers can put aside money each month to pay real estate taxes and homeowners' insurance, thus avoiding the need for large lump-sum payments. The company also pointed to its practice of not charging for certain standard services, such as automatic payment withdrawals, copies of payment histories and loan documents, and payoff statements, among others.

Moody's Investors Service has lowered Ocwen Federal Bank FSB's ratings for primary servicer of residential subprime mortgage loans and for special servicer from SQ1 ("Strong") to SQ2 (Above Average).The ratings reflect Ocwen's "excellent servicing performance and below-average financial stability," the rating agency said. Ocwen achieved "above-average collection results and strong loss mitigation" from May 1, 2002, through April 30, 2003, Moody's said. "Ocwen's low staffing ratio and extensive use of technology allow it to achieve impressive collection and default servicing metrics," the rating agency said. Ocwen, the mortgage servicing operation of Ocwen Financial Corp., is an established subprime loan servicer, but its parent is seeking to exit noncore business lines to focus on mortgage servicing and mortgage-related technology. Ocwen has been named as a defendant in potential class-action lawsuits alleging predatory servicing practices. Citing Ocwen's "already weak financial condition," Moody's said a negative outcome to the lawsuits "could further erode the company's financial position and its ability to sustain its otherwise impressive servicing results." Moody's can be found online at http://www.moodys.com.

Both commercial and residential mortgage securities saw more upgrades than downgrades from Moody's Investors Service last year, rating agency officials have told MortgageWire.In 2003, the downgrade rate for commercial mortgage-backed securities transactions fell to 4.3%, from 5.3% in 2002. The upgrade rate for CMBS rose from 2.4% to 5.1%. In the residential MBS sector, the upgrade rate rose to 5.1% in 2003 from 1.7% in 2002, while the downgrade rate increased slightly to 0.5% from 0.1%. Moody's analysts said "de-leveraging" that resulted from refinancing activity contributed to the improvement. The rating agency can be found online at http://www.moodys.com.

Two classes of PNC Mortgage Securities Corp. mortgage pass-through certificates have been downgraded and removed from Rating Watch Negative by Fitch Ratings.Class DB5 of series 2000-8 group 3&4 was downgraded from B to CC, and class IB5 of series 1998-5 group 1 was downgraded from B to CCC. In addition, two classes of PNC series 2000-8 group 1&2 were upgraded, and the ratings on 23 classes in four transactions were affirmed. The downgrades were attributed to expected reductions in credit enhancement. Fitch can be found on the Web at http://www.fitchratings.com.

The Federal Housing Administration's capital ratio rose to 5.21% in fiscal year 2003 from 4.52% in fiscal 2002, but capital reserves rose by only $100 million to $22.7 billion, according to the annual actuarial report prepared by Deloitte & Touche."Two large offsetting impacts" contributed to the increase in the capital ratio, the auditors said. The quality of FHA single-family loans endorsed in fiscal 2003 increased the economic value of the FHA mortgage insurance fund by $2.8 billion. "Countering this effect is the extraordinarily high prepayment activity that has adversely impacted the FHA's economic value during FY 2003, as well as the claim activity that has exceeded the levels predicted in our 2002 study," the Deloitte & Touche report says. FHA loan endorsements totaled $147.4 billion in fiscal 2003, but runoff totaled $193.2 billion. The total FHA portfolio fell to $382.2 billion in fiscal 2003 from $435.4 billion the previous year. Meanwhile, claims from default loans jumped from $3.9 billion in fiscal 2002 to $7.3 billion in fiscal 2003.

National City Corp., Cleveland, has agreed to buy Provident Financial, Cincinnati, for $2.1 billion in stock, a deal that will create the nation's eighth-largest subprime servicer.National City, which is also the ninth-largest prime lender, owns the fifth-largest subprime lender, First Franklin Financial of San Jose, and the 12th-largest subprime servicer, National City Home Mortgage of Pittsburgh. Provident's PCFS Financial Services unit has $10.7 billion in subprime receivables, ranking 14th nationwide, according to National Mortgage News. But among subprime funders, PCFS is ranked much lower, at 38th. (The rankings are based on third-quarter numbers.) Both banks have warehouse lending divisions that provide credit to nondepository mortgage bankers.

American Business Financial Services, Philadelphia, has reported a loss of $24.8 million ($8.35 per share) for the fiscal second quarter ended Dec. 31, 2003, down from net income of $2.1 million ($0.69 per share) a year earlier.Albert W. Mandia, executive vice president and chief financial officer of ABFS, attributed the quarterly loss to several factors, "including financial and human resource issues," which he said reduced the company's ability to originate loans and generate revenue. "The company also experienced $12.0 million of pretax noncash valuation adjustments on our securitization assets charged to the income statement," he said. "Additionally, operating expense levels that would support greater loan origination volume also contributed to the quarterly loss." The noncash adjustment mentioned by Mr. Mandia also included $2.7 million charged to other comprehensive income, a component of stockholders' equity. The securitization assets are interest-only strips and servicing rights, and the writedown in value is because of higher-than-anticipated prepayments on securitized loans. Mr. Mandia added that ABFS would likely incur operating losses through its fiscal fourth quarter.

Cohane Rafferty Securities, White Plains, N.Y., is selling a $528 million portfolio of Ginnie Mae servicing rights.Moreover, several other bulk deals are either in the market or about to come to market, servicing brokers told MortgageWire.The bid deadline on the Cohane portfolio is Wednesday, Feb. 18. In one other pending sale, Mortgage Industry Advisory Co., New York, is offering a $100 million bulk package of Ginnie servicing rights. The bid deadline for that package is Friday, Feb. 13. For more details on other deals see the Monday Feb. 16 issue of National Mortgage News.