Servicing

Mortgage giant Freddie Mac shocked the mortgage and bond markets Monday morning, announcing that its long-time chairman and chief executive Leland Brendsel had suddenly retired and that president and chief operating officer David Glenn had been fired.The company said Mr. Glenn had been let go because of "serious questions as to the timeliness and completeness of his cooperation and candor with the board's audit committee...." The company -- which is in the midst of reauditing its books -- said executive vice president Vaughn Clarke had resigned as well. The firm's stock price immediately plunged as news of the shakeup spread through the mortgage industry. One consultant close to Freddie Mac said he expects more firings and resignations in the weeks ahead. Meanwhile, Freddie's regulator, the Office of Federal Housing Enterprise Oversight, issued a statement saying it had created a special investigative team "to assume the review of accounting practices relevant to the restatement process." In the same statement, OFHEO blames Freddie Mac's reaudit woes on "management misjudgments that led to a misapplication of GAAP principles and disclosures of employee misconduct, specifically, altering and failing to supply documents relevant to the restatement process." In the wake of the firing and resignations, Freddie Mac named Gregory Parseghian as its president and CEO, and Shaun O'Malley as non-executive chairman. Paul Peterson has been named COO, and Martin Baumann CFO. In a conference call Monday, Mr. Parseghian tried to calm investors as well as the mortgage market. "Our key assets and capabilities are undiminished by the changes announced today," he said. "We have superior financial strength." Freddie Mac can be found online at http://www.freddiemac.com.

The Goldman Sachs Group is starting a market for derivatives based on mortgage prepayment speeds.The first auction of options and futures on prepayment speeds is scheduled to take place June 12. Thereafter, Goldman Sachs hopes to conduct the auctions on the second and fourth Thursday of each month. Each month, all extant options will effectively reopen as existing contracts. Goldman Sachs executives say that creating a market for prepayment derivatives will provide a better hedge for mortgage prepayment risk. "The key for the success or failure of this product is can we get mortgage servicers to participate," said Allen Brazil, managing director for mortgage and ABS research at Goldman Sachs, told MortgageWire. Buyers for the forwards and options will likely be mortgage servicers. Sellers of the derivatives are likely to include Wall Street firms, hedge funds, and other mortgage investors, Goldman Sachs believes.

Embattled subprime servicer Fairbanks Capital Corp., Salt Lake City, has fired its president and another top officer, MortgageWire has learned. A source familiar with the matter said, "more firings are in the works."In an unannounced move, Bill Garland, who had been president for about two years, was dismissed on May 23rd. Also let go a week ago Friday was Chris West, who was in charge of client and investor relations. Neither man is listed in the residential directory for Salt Lake City and could not be reached for comment. A spokeswoman for Fairbanks confirmed that Mr. Garland had left the company, but offered no other information about the matter. She would not comment at all on Mr. West. In regard to Mr. Garland the spokeswoman said, "There was no (press) release put out on it. We're just saying that he is no longer with the company." Fairbanks is under investigation by the Federal Trade Commission and the Department of Housing and Urban Development for its servicing practices. (See National Mortgage News issue of June 9 for more details.)

While affirming certain debt ratings for Cendant Corp. and its PHH Corp. subsidiary, Fitch Ratings says the outlook for the ratings of both firms is "negative."Fitch said the weak outlook for the travel sector weighed heavily on the negative outlook for Cendant, and that the action against Cendant affects the rating of mortgage subsidiary PHH. Fitch also said that the "cyclicality of the mortgage business" and the potential impact of current interest rates on the firm's mortgage servicing rights are factors in the negative outlook.

Accredited Home Lenders Holding Co., a subprime originator that has been one of the few companies in any industry to bring an initial public offering to market of late, has closed a $300 million securitization of first-lien loans through a subsidiary.Lehman Brothers Inc. was the lead manager of the transaction and Credit Suisse First Boston LLC. was the co-manager. The securitization was comprised of three classes of notes, each backed primarily by a pledge on one of three groupings of mortgages, the San Diego-based lender reported.

Standard and Poor's Rating Services has added Provident Funding Associates, Wachovia Bank, Washington Mutual Bank, RESIMAC Ltd., Archon Group Italia, and Pirelli & C. Real Estate Credit Servicing to its June Select Servicing List.Provident is now on the list as a residential mortgage servicer in the U.S. Wachovia gained a spot as an alternative residential mortgage servicer. In commercial mortgage servicing, Washington Mutual is now listed as a special servicer. On the international front, RESIMAC is now listed as a residential servicer in Australia. In Italy, Archon Group Italia is listed as a residential and commercial servicer, and Pirelli & C. is listed as a special servicer for residential and commercial loans. S&P also announced that World Savings Bank is no longer participating in its Select Servicer program as a residential mortgage servicer.

The Nonprime Mortgage Report default risk index rose slightly to 103 this quarter, according to University Financial Associates of Ann Arbor, Mich.The index measures the risk of default on newly originated nonprime credit quality mortgage loans, UFA said. "The index has been flat for over a year because falling interest rates, which reduce payment burdens for borrowers, are offsetting the eroding prospects for the underlying housing collateral," said Dennis Capozza, professor of finance at the University of Michigan and a principal in UFA. A reading of 103 means that the risk of default on new loans is only 3% higher than the average risk on nonprime loans originated during the 1990s. The analysis is based on a "constant quality" loan, measuring the impact of economic conditions at the time of loan origination.

Moody's Investors Service says that a build up of excess credit support is benefiting subordinate certificates in home equity securitizations.The build up of excess credit support allows subordinate note holders to receive principal payments before more senior mezzanine certificates in some transactions, the rating agency said. The phenomena is the result of record high prepayment rates due to refinancing. This seeming anomaly is a by-product of a structural feature of most senior/subordinate home equity transactions, which releases excess credit support to the subordinate classes after a step-down date, Moody's said.

Following on the heels of a similar report from OFHEO, Freddie Mac reported that its conventional home price index slowed in the first quarter.However, Freddie Mac pegged the annualized rate of growth at 5.1% in the first quarter based on its "repeat sales" index, significantly higher than the 3.77% estimate from OFHEO. Freddie Mac's index suggests home price appreciation has only slowed modestly since the fourth quarter of last year. Freddie found that home prices are rising faster on the Pacific Coast and Mid-Atlantic regions than in other parts of the country.

Fairbanks Capital Corp., the nation's largest subprime subservicer, charged borrowers "improper fees" on Fannie Mae-owned loans, according to a new audit conducted by the secondary market giant.Responding to a request by Sen. Paul Sarbanes, D-Md., Fannie audited Fairbanks' servicing practices on its loans, discovering, among other things, that the company had inadequate controls and inadequate dispute resolution practices. A letter written by Fannie Mae chairman Franklin Raines to Sen. Sarbanes notes that Fairbanks has agreed to "implement remedial actions" and "fairly compensate any borrowers charged inappropriate or improper fees." Sen. Sarbanes said the agreement between Fannie Mae and Fairbanks "represents a dramatic step toward preventing the abuses that have been so harmful to homeowners..." Freddie Mac is conducting a similar review of Fairbanks' servicing practices and plans to report its findings to the Maryland Senator "shortly," a spokesman said. Fairbanks, based in Salt Lake City, also is reviewing its portfolio and it has pledged to resolve consumer disputes in an equitable manner, a spokeswoman said.