Servicing

Exposures to problematic second-lien mortgage assets contributed to significant third-quarter net losses at bond insurers Ambac Financial Group Inc., New York. Further, MBIA Inc., Armonk, New York took a big loss as well. Ambac took a $2.4 billion third-quarter net loss that it said was "primarily due to recording net mark-to-market losses on credit derivatives, increased loss provisioning primarily related to second-lien residential mortgage-backed securities insurance transactions and market losses on RMBS" that were "partially offset by increase accelerated premiums from refundings." Moody's Investors Service subsequently downgraded its rating of Ambac Assurance Corp., a move Ambac protested as it has in the past, saying it may set back positive steps it has been taking to improve its liquidity. Separately, MBIA suffered an $806.5 million net loss that it said was "driven primarily by increases to loss reserves on the company's second-lien residential mortgage exposures and net realized and unrealized losses attributable to the company's asset liability management business."

California Governor Arnold Schwarzenegger has proposed a 90-day moratorium on owner-occupied homes where a 'notice of default' has been filed. The moratorium is part of a larger relief package for the ailing California housing market, the largest in the nation in terms of loans outstanding at roughly $1.8 trillion, or 19% of the national market, according to figures compiled by the Quarterly Data Report. The governor wants his proposals considered during a special session of the legislature he will call to deal with the state's budget crisis. Even if the moratorium becomes law, lenders can gain an exemption if they can demonstrate to state officials they have "an aggressive" loan modification program in place, according to a statement released by the governor's office. However, the loan modification model is based on a maximum housing debt-to-income ratio of 38%. The model outlined by the state aims to reduce monthly mortgage payments by 25% to 30%.

Champion Mortgage of Dallas is expanding out its REO financing program to include servicing firms that are trying to sell foreclosed properties. Champion, a brand owned by Nationstar Mortgage, is focusing its retail-only effort on what it calls its "partners," which hold about 50,000 REO (real estate owned) properties. Up until recently it was only funding REO held in its own portfolio. The company declined to name the firms. "These are servicers and asset managers," said company EVP Steve Hess. "We respect their privacy." Champion's loan of choice is a Federal Housing Administration-backed mortgage where the buyer of the REO has a FICO score of at least 650.

Centerline Holding Co., a New York-based alternative asset manager with a focus on real estate funds, said it has reduced its workforce by about 20%. "A significant part of the company's restructuring includes shifting resources to enhance its special servicing and asset management functions," the company said. The company has been struggling to manage debt load and recently saw Moody's Investors Service downgrade its corporate family rating to B2 from B1 as a result of a payment deferment. Centerline said it is in "active negotiations" with its lenders to implement a debt-financing package that will stabilize its finances.

GMAC Financial Services expressed some doubt about its ResCap's mortgage unit's future in preliminary third-quarter results that show a substantial net loss at ResCap is likely to be the main contributor to an even larger net loss for the company as a whole. "Adverse market conditions have made it difficult for ResCap to maintain adequate capital and liquidity levels," GMAC said. "As a result, absent economic support from GMAC, substantial doubt exists regarding ResCap's ability to continue as a going concern." ResCap's estimated $1.9 billion 3Q loss actually represents a relative improvement over last year's $2.26 billion decline, but overall, GMAC's preliminary $2.5 billion 3Q loss this year is greater than last year's $1.6 billion 3Q net loss for the company as whole.

TCF Financial, the banking parent of a mid-sized residential servicing company, has received preliminary approval from the Treasury Department to participate in the agency's capital purchase program. In a statement, TCF of Wayzata, Minn., said the government will buy $361 million worth of preferred stock in the depository and receive a warrant to buy 3.2 million shares of its common. At mid-year, the bank's subsidiary, TCF Mortgage of Minneapolis, ranked 54 among residential servicers with $6.7 billion in housing receivables, according to the Quarterly Data Report. The capital purchase effort is part of the government's new Troubled Asset Relief Program, legislated into law by the Emergency Economic Stabilization Act.

Popular, Inc., Puerto Rico's largest mortgage lender, has completed the sale of loans and servicing assets from its U.S. mortgage subsidiary to units of Goldman Sachs. Popular said the sale reduces its loan and servicing rights holdings by $700 million, freeing up that much in additional liquidity and significantly reducing the bank's holdings of U.S. subprime mortgage assets. "The closing of this transaction is a major step forward in our efforts to build capital and liquidity, and create a leaner and more efficient business," said Richard Carrion, Chairman and CEO of Popular. Terms were not disclosed.

PMI, which reported a third quarter loss of $229 million, said it expects paid claims, net of captive reinsurance recoveries, for its U.S. mortgage insurance operations to be between $850 million to $900 million for full year 2008. This is a reduction from its previous expectation for full year 2008 paid claims. Earlier, PMI had estimated that claims in its U.S. mortgage insurance business would be between $900 million and $975 million.

The entire mortgage insurance industry will remain capital constrained, especially in the absence of "significant government actions" such as the Troubled Asset Relief Program, declared Friedman Billings Ramsey analyst Steve Stelmach. The comment appeared in a report on The PMI Group Inc., Walnut Creek, Calif. "We continue to expect the difficult credit environment (particularly in the seasonally weak fourth quarter) to weigh on results, despite heightened efforts on the parts of mortgage lenders and servicers to more proactively mitigate losses. In addition, at 15.8-to-1 risk-to-capital, leverage is stretched during a time when the entire industry's ability to gain access to capital or reinsurance is limited," he wrote. Capital levels continue to erode at PMI because of the sale of its Australian and Asian units. Management expected this to occur, but Mr. Stelmach said, "The lower capital level is discouraging nonetheless."

The serious delinquency rate on FHA single-family loans rose 31 basis points to 6.91% during fiscal year 2008 (which ended Sept. 30), according to Federal Housing Administration data. The increase occurred despite FHA adding 780,000 mortgages to its insured portfolio. The federal mortgage insurance agency ended FY 2007 with 6.60% of its loans 90 days or more past due. But FHA experienced a surge in mortgage originations during FY 2008 and its insured portfolio increased by 22% to 4.3 million single-family loans. In normal times, this influx of new loans would have driven the serious delinquency rate down. However, FHA borrowers are facing tough times and one-third of FHA foreclosed properties are in Ohio and Michigan, which are suffering from a prolonged economic downturn and loss of jobs. Agency officials also note that FHA loans with down payment assistance provided by nonprofits have a default rate three times higher than other FHA loans. And the performance of those loans will be a "drag" on the FHA insurance fund for the next three to five years, officials at FHA said. Congress passed a ban on DPA on FHA loans that went into effect Oct. 1. But DPA still accounted for 30,900 of the 150,000 FHA loans closed in September.