Servicing

In the wake of the poor earnings report and disclosures about additional government assistance at Bank of America Corp., Charlotte, N.C., Fitch Ratings has cut the long-term issuer default rating on the company's bank subsidiaries from "AA-" to "A+". The parent company's long-term IDR, as well as the IDR of newly acquired Merrill Lynch & Co., were affirmed at "A+". Furthermore, the preferred stock ratings were cut from "A" to "BBB" and placed on ratings watch negative. The actions, Fitch said, are because the combined BofA/Merrill Lynch would experience ongoing operating and asset quality pressures in the current environment. "The actions, which result in a convergence of BofA's IDR at its support floor, also reflect the fact that government support has been forthcoming and additional support will likely be provided in the future if necessary, due to BofA's prominence in the global and domestic banking system," said Fitch. Merrill Lynch's individual rating has been cut to "F", which Fitch said reflects its "view that this entity would likely not have survived absent assistance provided by the U.S. Treasury."

In a few weeks, President Barack Obama will lay out a comprehensive plan to stabilize the banks, revive credit markets and address the housing crisis, according to Timothy Geithner, the president's nominee to be Treasury secretary. The president of the New York Federal Reserve Bank told a Senate panel that the plan will include a bankruptcy provision to help struggling homeowners and possibly a proposal to move toxic assets off bank balance sheets into a "bad bank." Mr. Geithner stressed the comprehensive plan is still under development and he did not want to provide specific details. But he noted the administration wants to craft the bankruptcy proposal so it does not harm the mortgage market and drive capital away. "We are supportive of doing that in the most careful possible way," he said during his confirmation hearing. He also noted it's "enormously complicated" to draw up a bad bank plan that is cost effective. A team is looking at it today, he testified. "It is possible it will be part of the solution going forward." In stabilizing the banks, the administration wants to get the credit markets going again, including commercial and residential mortgage markets. "We also have to provide much more substantial direct support for credit markets," Mr. Geithner said.

The Prestwick Mortgage Group is brokering the sale of mortgage loan servicing rights on a $12 million portfolio of loans primarily backed by homes in Michigan. The average principal balance on the Fannie Mae loans is $57,412 with a weighted average note rate of 7.2% and a weighted average servicing fee of 0.2912%. The loans have an average seasoning of 125 months. All the loans are fixed rate. Bids are due on Thursday, January 29.

State Street Corp., Boston, has $15 billion of low-yielding securities maturing this year that it plans to re-invest in AAA-rated mortgage- and asset-backed securities at higher yields "if government programs begin to normalize markets." The company's chief executive and chairman Ronald E. Logue mentioned the plans for possible MBS/ABS purchases in conjunction with projections for net interest income in 2009, which he said he expects to be flat compared to 2008. The company on Tuesday said "ongoing illiquidity in the markets" caused after-tax unrealized mark-to-market investment losses of $6.3 billion in 2008. It said that none of its securities are in default and all are current on principal and interest. In the fourth quarter, State Street's net income fell to $65 million from $223 million during the same period a year ago.

New home sales in the Golden State were anything but golden in November, according to the latest figures released by the California Building Industry Association. Sales for the month were 63% below November 2008, "which was an extremely bad month," says CBIA President Robert Rivinius. "And it's looking like December wasn't any better." A mere 1,336 new homes and condominiums were sold in November in the subdivisions tracked by Costa Mesa-based Hanley Wood Market Intelligence, compared to 3,592 a year earlier. Single-family sales were down by 62%, while townhouse and condo sales were off 71%. The decline is a result of the usual slowdown in sales around the holidays plus the continued difficulty in securing financing. The median base price of homes sold during the 12-month period fell 13.5%. CBIA's Mr. Rivinius continued to hammer on lawmakers in both Sacramento and Washington to deal with the foreclosure situation and enact a stimulus package that has housing at the top of the list.

The Government National Mortgage Association will consider the effect of the Hope for Homeowners program before taking action against security issuers whose pools have high delinquencies. The agency requires issuers to maintain delinquency rates on outstanding pools below certain thresholds. Ginnie can take a variety of actions against a lender that fails to do so, such as forbidding it to issue new mortgage-backed securities or yanking its license to do business with the agency. In a memo to lenders dated Friday, Thomas R. Weakland, the agency's acting executive vice president, wrote that Hope for Homeowners loans "may experience higher delinquency levels than other FHA loans." The higher delinquency rates may become starkly apparent, because, as Mr. Weakland pointed out, Hope for Homeowners loans can only be pooled into one type of Ginnie security. Hence, "if an issuer's delinquency levels exceed Ginnie Mae's threshold, Ginnie Mae will consider the impact of H4H loans when determining the nature of any action it may take." Hope for Homeowners is a temporary program created last year under which borrowers who are at risk of being foreclosed on can refinance into a new, more affordable loan insured by the Federal Housing Administration. Ginnie also said Friday that Hope for Homeowners loans must have a term of 30 or 40 years, not one in between, to be included in its securities. The agency will create separate pools for the 40-year loans, which may not be commingled with the 30-year ones, Mr. Weakland wrote. Originally the maximum term for the new loan was 30 years, but this month the FHA extended it to 40 years, and said it would let lenders set the term at "some intermediate number of years."

Home prices have fallen 18% since 2006 and could drop another 10% in 2009, which means the average mortgage could be "underwater" soon, according to a former Fannie Mae executive who served as the GSE's chief credit officer in the 1980s. Speaking before the American Enterprise Institute, former GSE executive Edward Pinto said the average loan-to-value ratio on most single-family loans was roughly 95% at year-end 2008. Mr. Pinto, now a consultant, said that figure could rise to 109% at the end of this year, a first. He noted that a 20%-plus drop in home prices has not occurred since the Great Depression when values fell 24% between 1929 and 1933. LTVs, though, were much lower in the Depression. The consultant relies on home price indexes issued by the Federal Housing Finance Agency and S&P Case Shiller in making his price estimates. Mr. Pinto said the government is on the hook for nearly 70% of all mortgages due to its backing of Fannie Mae, Freddie Mac, the Federal Home Loan Banks, the Federal Housing Administration and Federal Deposit Insurance Corp. If Congress passes bankruptcy reform legislation that allows for mortgage cramdowns, the government will be "cramming down the loans they are responsible for," Mr. Pinto said.

The number of large commercial real estate loans going into default is on the rise, according to Fitch Ratings. In December, the delinquency rate on loans packaged into commercial mortgage-backed securities rose to 0.88%, Fitch said, due in large part to the default of two loans with balances greater than $100 million. In November, two loans greater than $70 million went into default, and Fitch managing director Susan Merrick expects more large CMBS loans to go into default. "What began as weakness in the performance of smaller properties located in tertiary markets now includes larger collateral in secondary and primary markets," she said. Fitch also noted that young loans from 2008 CMBS deals are seeing defaults rise at a historically fast pace. Fitch blamed high leverage on loans in recent CMBS vintages coupled with the economic recession for the rising default rate. Fitch predicts the CMBS default rate will rise to about 2% by the end of this year.

MGIC Investment Corp. is not going to be profitable in 2009, the top executive at the Milwaukee-based mortgage insurer declared, even though its fourth quarter and full year results were improved over the previous year. Curt S. Culver, chairman and chief executive, said falling home values and the impact of the recession have caused a significant increase in delinquencies in the fourth quarter at MGIC. However, in spite of the difficult operating environment, he continued, MGIC has adequate resources to meet its claim obligations. Total delinquencies, including bulk loans, was 12.37% at the end of the fourth quarter, up from 7.45% one-year prior. Remove the mostly subprime bulk loans from the equation and MGIC had a delinquency rate of 9.51%, up from 4.99% at the end of 2007. The company reported a net loss for the quarter of $273.3 million ($2.21 per share), an improvement over the fourth quarter 2007 loss of $1.47 billion ($18.17 per share). For the full year, MGIC lost $518.9 million ($4.55 per share), compared with a loss of $1.67 billion ($20.54 per share) one-year prior. New insurance written during the fourth quarter was just $5.5 billion, a substantial decrease from the $24 billion written in the fourth quarter 2007.

Fannie Mae's and Freddie Mac's acquisition of foreclosed properties jumped 25% in the third quarter to a 9,167 monthly rate and the GSEs' inventory of real estate owned also jumped by 25%, according to their regulator, the Federal Housing Finance Agency. The mortgage giants held 95,550 REO properties as of Sept. 30, compared to 76,150 at the end of the second quarter. The latest data also show that the government-sponsored enterprises started 47,100 foreclosures in October, up from 41,000 in September and completed 17,000 foreclosure sales, up from 15,600 in September. Meanwhile, the Fannie and Freddie delinquency rates also continue to rise. But FHFA says loan modifications are increasing. "Loan modifications completed increased to 5,639 for October from a monthly average of 4,475 for the third quarter - an increase of 26%," the regulator says in a report to Congress. The two companies own or guarantee 30.6 million mortgages. In an attached letter, FHFA director James Lockhart said he met with the some of the largest trustees and servicers of private-label Alt-A and subprime mortgage securities on Dec. 23. "As a result of the discussion, the group agreed to work on a set of best practices and alternatives to eliminate as many of the barriers to modifying loans as possible and to encourage public and private participants to work together to eliminate obstacles," Mr. Lockhart says in the Jan. 16 letter.