Servicing

Standard & Poor's, in a new report, predicts that subprime losses on 'AAA' rated mortgage bonds may not be as bad as some are projecting. S&P - basing its findings on subprime ABS issued from mid-year 2005 to mid-year 2007 - said the losses on the underlying loans could reach $180 billion but the writedown in the principal loan amount on these securities will be just $85 billion. Analysts at the firm note, "The difference between the projected write-downs and losses reflects the various forms of credit enhancement that support the rated securities, such as subordination, overcollateralization, and excess spread. A principal write-down on the RMBS certificates occurs when the amount of collateral losses exceeds the amount of available credit support."

Despite Fannie Mae posting a $29 billion third quarter loss, Treasury Secretary Henry Paulson believes the company - and its sister GSE, Freddie Mac - are on "stable" financial footing. At a press conference Wednesday, Mr. Paulson said in a few weeks he will share his "views" on the future of Fannie and Freddie. He noted that Fannie's third quarter loss was "in the range of what we expected." Meanwhile, FBR Capital Markets issued a report predicting that Fannie could post losses of $20 billion to $40 billion over the next four quarters. As reported, Fannie Mae executives recently said they are worried that the company's credit facility with the Treasury "may prove to be insufficient," noting that it could run into liquidity problems that would impair its ability to support the mortgage market.

The American Securitization Forum is working on a proposal that will allow MBS servicers to sell delinquent mortgages through the Treasury's Troubled Asset Relief Program. "We believe there is significant opportunity for TARP to purchase individual distressed loans out of mortgage-backed securities trusts, which would give the Treasury Department unlimited discretion to modify the loans," ASF deputy executive director Tom Deutsch told the House Financial Services Committee. The idea comes in the wake of an announcement by the Treasury Department that it likely will not be spending much money on buying troubled mortgage assets after all. Mr. Deutsch noted that whole loans in securitized trusts are not usually sold because of legal, tax, and accounting constraints. However, ASF is trying to work through those issues. "There are opportunities and obstacles for servicers to sell individual distressed loans at discounts to Treasury," he said. "We expect to report out some initial progress on this initiative at the end of this week." Even though Treasury may not spend much of the $700 billion to buy mortgages, Secretary Henry Paulson noted that his agency might engage in what he called "targeted" mortgage purchases.

Data shows nearly one-third of Americans who sold their home in the past year lost money, and that trend is likely to persist, according to Zillow. According to the third quarter Zillow Real Estate Market Reports, which evaluates 163 metropolitan areas, some of the country's largest metropolitan areas are seeing a decline of 9.7% year-over-year in home values with the Zillow Home Value Index currently standing at $202,966. Combined with the overall economic crisis, depreciation in home values is causing additional distress to homeowners who need to sell their property at a loss due to foreclosure or other reasons. Foreclosures made up almost one in five, or 18.6%, of all transactions in the past 12 months. 30.2% of homes sold were sold for a loss, up from 23.7% at the end of the second quarter. In 17 markets - 14 of which are in California - more than half of homes sold in the past year were sold for a loss.

Thomas Marano, CEO of Residential Capital, says his company supports the streamlined mortgage modification plan as espoused by the government-sponsored enterprises and the Federal Housing Finance Agency. He noted that ResCap has held 4,300 face to face homeownership counseling sessions with troubled borrowers whose loans are serviced by the company this year. It has also helped 251,000 customers avoid foreclosure, Mr. Marano said. "Through a combination of outbound calls, letters and home visits, we have achieved a 14% customer contact rate in an effort to work with our customers and preserve homeownership."

Triad Guaranty Inc., Winston-Salem, N.C., lost $160.1 million ($10.69 per share) in the third quarter 2008 as the amount of risk in default or in foreclosure continues to increase and as a result. In the second quarter this year, it lost $198.8 million ($13.36 per share). Paid losses for the quarter were $59.8 million, down from $68.2 million in the second quarter 2008. The company said the improvement was due to increased loss mitigation efforts, servicer delays in filing claims and foreclosure moratoriums. Ken Jones, president and chief executive, said because of the increase in defaults and the related provision for expected future paid losses, Triad has a deficiency in assets (negative stockholder equity) of $28.4 million as of Sept. 30, 2008. "Our underlying performance during the quarter was generally consistent with our run-off plan, as the plan projected significant losses in the early stages of the run-off period. Additionally, we have not realized a significant portion of the structured benefits on the modified pool stop losses and captive reinsurance benefits that we anticipate in the subsequent years of the run-off. Finally, it should be noted that no benefit has been recognized in these financial statements from our $95 million excess of loss reinsurance policy that is presently in arbitration," said Mr. Jones.

Fannie Mae and Freddie Mac have adopted a "streamlined" approach to modifying delinquent mortgages that regulators and industry groups hope will be accepted by investors in private-label nonprime mortgage-backed securities. For borrowers who are 90-days past due and not in bankruptcy, servicers of Fannie and Freddie MBS can reduce the interest rate to 3%, extend the loan up to 40 years and defer payments on part of the principal. The objective is to reduce borrowers' payments to 38% of gross income through a process that is fast and simple and helps homeowners who have seen their credit scores deteriorate and their home equity disappear. GSE regulator James Lockhart announced the new streamlined modification program and urged private-label securities investors to quickly adopt the program as an industry standard. "Broad acceptance and effective implementation could stabilize communities and property values," he said. The two government-sponsored enterprises will require their servicers to implement the new modification program by Dec. 15.

The federal government should consider extending a lending facility to non-bank mortgage servicers to avoid "significant disruptions" if they run short of funds in making advances on delinquent mortgages, according to the American Securitization Forum. ASF deputy executive director Tom Deutsch told a congressional committee that the amount of advances servicers have to pay to investors in mortgage-backed securities has "risen exponentially," while the numbers of banks that help servicers finance advances has "shrunk dramatically." If servicers cannot pay the advances, the servicing must be transferred to another mortgage servicer, which can be disruptive to borrowers and any on-going loan workouts. "Federal government provision of lending or guarantee facilities for liquidity constrained servicers" would pose "little or no risk to the taxpayer," Mr. Deutsche testified.

Triad Guaranty Inc., Winston-Salem, N.C., lost $160.1 million ($10.69 per share) in the third quarter 2008 as the amount of risk in default or in foreclosure continues to increase and as a result, loss reserves at the company increased significantly. In the second quarter this year, it lost $198.8 million ($13.36 per share). Paid losses for the quarter were $59.8 million, down from $68.2 million in the second quarter 2008. The company said the improvement was due to increased loss mitigation efforts, servicer delays in filing claims and foreclosure moratoriums. Ken Jones, president and chief executive, said because of the increase in defaults and the related provision for expected future paid losses, Triad has a deficiency in assets (negative stockholder equity) of $28.4 million as of Sept. 30, 2008. "Our underlying performance during the quarter was generally consistent with our run-off plan, as the plan projected significant losses in the early stages of the run-off period. Additionally, we have not realized a significant portion of the structured benefits on the modified pool stop losses and captive reinsurance benefits that we anticipate in the subsequent years of the run-off. Finally, it should be noted that no benefit has been recognized in these financial statements from our $95 million excess of loss reinsurance policy that is presently in arbitration," said Mr. Jones.

The liquidity-strapped American Express Co. is continuing to handle credit-card-based mortgage payments for customers of IndyMac Bank and the program will not be affected by AmEx's licensing as a bank holding company, according to a spokeswoman. The company currently operates two U.S. bank entities: American Express Centurion Bank, an industrial loan bank chartered in Utah, and American Express Bank FSB, a federal savings bank, according to Standard & Poor's, which has said it is leaving the company's rating unchanged in the wake of the move. The spokeswoman said neither bank entity has mortgage involvement. American Express last year also had started a program that allowed consumers to make their mortgage payments through their credit cards but IndyMac, a bank that this year was taken into receivership by the Federal Deposit Insurance Corp., has been its only participant, the spokeswoman said.