Servicing

Lower coupon mortgage-backed security prepayment speeds, which largely decelerated as expected in July, are forecast to continue decelerating to some extent in August. "I think we slow again," said Art Frank, director and head of mortgage-backed securities research at Deutsche Bank. But the slowdown in speeds could decelerate somewhat due in part to August's seasonal increase in housing sales, he added. Mortgage-backed security prepayment speeds during July came in closer to expectations than they have been recently with the exception of certain "cusp" coupons. There was a pronounced deceleration in these 5% and 5.5% coupons, according to researchers at three investment banks.

The bulk of more than 150 recent CMBS-backed synthetic CDOs ratings lowered in a recent Standard & Poor's review could face could face further downgrades. Standard & Poor's has lowered 179 ratings from 63 commercial mortgage-backed security-backed synthetic collateralized debt obligation transactions, 169 of which remain on CreditWatch Negative. S&P also lowered five ratings from five CDO retranchings referencing residential MBS transactions and placed one of these ratings on CreditWatch Negative. The rating changes follow a monthly review of the synthetic CDO sector in which 173 ratings from 116 U.S. corporate-backed transactions also were lowered. S&P left 65 of these ratings on CreditWatch Negative.

Standard & Poor's Ratings Services has lowered its ratings on 37 classes from three residential mortgage-backed securities transactions backed by U.S. prime jumbo loans, alternative-A and subprime credit mortgage collateral issued in 2004 and 2006. S&P also removed 22 of the lowered ratings from CreditWatch with negative implications. "Although cumulative losses were generally low compared with our projected lifetime losses for the transactions reviewed, we are projecting an increase in losses due to increases in delinquencies and the current negative condition of the U.S. housing market," S&P said. In addition to lowering the ratings of 37 classes, S&P affirmed its ratings on 13 classes from the same transactions.

Ambac's ratings by Standard & Poor's Corp. appear relatively steady for now, but continuing residential mortgage-backed securities deterioration held to be largely responsible for the company's second quarter loss of close to $2.4 billion could be a concern going forward. Standard & Poor's analysts said they have revised their outlook on Ambac Assurance Corp.'s counterparty credit rating to negative from developing and that their outlook for Ambac Financial Group Inc.'s counterparty credit rating remains negative. But they also noted that they continue to consider the outlook for AAC's financial strength rating outlook to be "developing" because they could raise that rating going forward.

The Federal Home Loan Bank of San Francisco had net income of $303 million for the second quarter of 2009, up from $233 million for the same period last year, as it benefited from $168 million in net gains associated with derivatives, hedged items and financial instruments carried at fair value. However, FHLB-SF also took a non-credit impairment charge of $1.2 billion and a credit impairment charge of $88 million related to non-agency mortgage-backed securities in its held-to-maturity portfolio. The impairment was due to a lack of liquidity in the MBS market affecting the valuation of the securities. As of June 30, 2009, FHLB-SF had a regulatory capital-to-assets ratio of 6.1%, well above its 4% regulatory requirement, and its risk-based capital was $14.6 billion, also well above the $8.2 billion regulatory requirement.

The net loss for Triad Guaranty Inc., Winston-Salem, N.C., ballooned to $359.4 million ($23.91 per share) for the second quarter of 2009, compared with a loss of $55.2 million ($3.68 per share) for the first quarter of 2009 and $198.8 million for the second quarter of 2008 ($13.36 per share). Company president and chief executive Ken Jones said the cure rates on loans in default had a further decline during the second quarter of 2009, plus Triad had higher severity on settled losses. Settled losses increased significantly at the company as more loans from its 2006 and 2007 book of business completed the foreclosure process. Triad increased its loss reserves by $279 million during the quarter. As of June 30, 2009, total insurance in force at Triad, which is in run-off status, fell to $57.5 billion, a decline of just under 5% from March 31, 2009. Net loss and loss adjustment expenses at Triad were $431.4 million for the second quarter of 2009, compared with $101.6 million for the first quarter of 2009 and $292.7 million for the second quarter last year. During the second quarter, Triad recognized benefits of $285.4 million from risk-sharing arrangements, including captive reinsurance programs. This compares with $97.4 million in the first quarter of 2009 and $52.4 million in the second quarter last year.

The Comptroller of the Currency is urging national banks to take a look at the Federal Housing Administration loan program that can be used to restore foreclosed homes and help stabilize neighborhoods. The FHA 203(k) program provides government insured financing for the purchase and renovation of a property in a single loan transaction. OCC is promoting the benefits of FHA 203(k) loans in its "Community Development Insights" magazine. "This product can be used by banks to develop new business, mitigate risk, enhance profitability, as well as assist in the revitalization and stabilization of neighborhoods negatively impacted by the current foreclosure crisis," OCC says in the magazine. FHA commissioner David Stevens said he welcomes OCC's efforts to increase bank participation in the FHA loan program "With so many bank-owned properties in need of repairs, this program offers a great way for homebuyers to finance both the purchase and rehabilitation of these homes," Mr. Stevens said.

Freddie Mac reported a profit of $768 million in the second quarter and positive net worth of $8.2 billion so it will not have to seek additional capital from the Treasury Department this quarter. It is a remarkable turnaround for a company that posted a $9.9 billion loss in the first quarter. But after the paying the Treasury $1.1 billion in dividends for previous capital infusions, Freddie had a net loss per common share of $0.11 for the second quarter. "We are pleased that our financial results allow us to finish the quarter with a positive net worth," Freddie interim chief executive John Koskinen said. But he said the company remains cautious due to the recession and rising foreclosures. Freddie absorbed $5.2 billion in credit-related expenses in the second quarter, compared to $9.1 billion in the first quarter. The serious delinquency rate on its $172 billion Alt-A portfolio hit 9.44% in the second quarter. Overall, 2.9% of the GSE's single-family mortgages are 90 days or more past due. "Second quarter results were driven primarily by $4.3 billion in net interest income mainly due to lower funding costs, as well as $4.2 billion in gains on the company's derivative portfolio," Freddie said.

The Government National Mortgage Association has hired Bank of America to service the roughly $25 billion in FHA receivables it seized from Taylor, Bean & Whitaker last week, according to industry sources. One investment banking official also noted that TBW is a major servicer of Freddie Mac-guaranteed loans and that the GSE may soon make a decision regarding its rights. "They haven't serviced for Fannie in years," said the banker. At the end of March TBW, a non-bank, ranked 13th nationwide among residential servicers with $78.2 billion in receivables, according to the Quarterly Data Report. At press time officials at BoA, GNMA, Freddie Mac and TBW were not commenting or had not returned telephone calls about the matter. Last week the Federal Housing Administration suspended the Ocala, Fla.-based TBW as a lender which then caused it to pull the plug on its wholesale division. Shortly before that, TBW's $300 million financial rescue of its chief warehouse provider, Colonial Bancshares, fell apart after the Alabama bank reported a huge loss. Colonial is now the subject of a federal probe of its warehouse lending operations.

Negative equity and unemployment pressures have caused Fitch Ratings to take various ratings actions on 767 alternative-A credit residential mortgage-backed securities deals. "Home price declines have resulted in negative home equity for approximately half of the remaining performing borrowers in the 2005-2007 vintages and approximately 10% of the remaining performing borrowers for all transactions prior to 2005," said Fitch managing director Vincent Barberio. "Unemployment is up significantly since our last alt-A rating review," he added. Although net roll-rates of performing borrowers into a delinquency status "have improved from the seasonal high in December, the net roll-rates for both the pre-2005 and 2005-2007 vintage groups in the first half of 2009 were approximately double that experienced during the same period in 2008 when modified loans are excluded," Fitch said. The number of alt-A loan mods completed "has risen but remains relatively limited to date," Fitch said.