Servicing

Bank of America, which saw its credit losses more than double to $6.45 billion in the third quarter, is blaming the carnage on delinquent consumer loans, including home mortgages -- but also lines of credit it extended to homebuilders. The bank -- whose results now include the Countrywide Home Loans franchise -- also wrote down the value of its Fannie Mae and Freddie Mac preferred stock by $320 million. It now holds $13.36 billion in nonperforming loans, a stunning 300% increase over the past 12 months. (It's believed that part of the increase is attributable to the whole-loan portfolio it inherited when it bought Countrywide.) BoA said it modified 73,000 mortgages for customers during the quarter -- compared with 14,000 in the same period a year ago. Despite the monumental charges, the bank earned $1.18 billion in the third quarter, including $259 million in "operating" earnings from Countrywide.

Citigroup and Wells Fargo moved their arguments over who has a valid deal to acquire Wachovia into several courtrooms over the weekend. On Oct. 4, Justice Charles Ramos of the Supreme Court of the State of New York issued an order giving Citi emergency injunctive relief extending the exclusivity agreement with Wachovia until further order of the court. Under the order, Citi and Wachovia must appear before the judge on Oct. 10. In a statement, Citi said it is prepared to resume negotiating in good faith to complete the transaction. The next day, a New York State appellate court vacated the Oct. 4 order. A statement from Wells Fargo said it was "pleased that the unfounded order entered yesterday has been vacated. Wells Fargo will continue working toward the completion of its firm, binding merger agreement with Wachovia Corp." In its own statement, Wachovia said Citi "is always free to make a superior offer to Wachovia." Furthermore, two Wachovia shareholders, Mary Louise Guttmann and Leslie M. "Bud" Baker, say they have obtained a temporary restraining order from Mecklenburg County (N.C.) General Court of Justice, Superior Court Division, prohibiting Citi from taking legal action to enforce any provisions regarding the exclusivity limitations.

Freddie Mac is increasing its loan fees on interest-only mortgages starting Jan. 2 and tightening its rules on appraisals and streamlined refinancings involving "piggyback" loans. In a Freddie Mac Update, the secondary-market agency told lenders that it is planning several changes in loan pricing and credit requirements. Starting Jan. 2, Freddie will "no longer allow the new mortgages to pay off subordinated financing" in a streamlined refinancing of a piggyback loan. In purchasing loans on a flow basis, Freddie will require updated appraisals for loans delivered more than 120 days after origination. Seasoned mortgages sold more than 365 days after origination will no longer be purchased on a flow basis. Freddie will purchase those seasoned loans in bulk sales.

The Treasury secretary will be able to use loan guarantees and credit enhancements to facilitate loan modifications under the newly passed Emergency Economic Stability Act, which gives the Treasury broad authority to purchase $700 billion of troubled mortgage assets. Such guarantees may give the Treasury a carrot to get institutions to modify their loans without directly acquiring the loans. "It has the ability to create incentives to leverage the private sector with minimal initial cash outlays," said FDIC Chairman Sheila Bair. "I am particularly pleased the bill includes provisions for loan guarantees and credit enhancements on whole loans." The Treasury is expected to conduct its first auction to purchase troubled assets in about four weeks, and it is planning to hire 5-10 asset managers to service and modify the assets, sources say. In addition to private asset managers, the Treasury also can contract with Federal Deposit Insurance Corp. to manage residential mortgages and mortgage-backed securities.

The House of Representatives, by a vote of 263-171 early Friday afternoon, approved a $700 billion rescue package of the credit and mortgage markets paving the way for the bill to be sent to President Bush. The president signed the bill almost immediately and thanked members of Congress for passing the legislation so quickly. "By coming together on this legislation, we have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country." Mr. Bush warned, however, that it will take time to implement an effective troubled-asset purchase program and it will take some time before it has an impact on the economy. Treasury Secretary Henry Paulson said he will move rapidly, but carefully, in implementing the new tools provided in the rescue bill. "In the coming days, we will work with the Federal Reserve and the FDIC to develop strategies to deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system," the secretary said. Rep. Judy Biggert, R-Ill., said during the debate Friday that market volatility, changes to the bill, regulatory commitments, and Republican attempts to limit its price tag helped persuade her to come on board after voting no on Monday. "I reluctantly support the bill and look forward to revisiting the issue as Congress monitors the program to ensure that we minimize risks and that taxpayers see a return on this investment," she said.

UBS said Friday that it will "substantially downsize real estate and securitization" as part of a "repositioning" of its investment bank. "UBS has already taken a number of actions to reduce its balance sheet, implement a new market-based funding model, and reduce risk and headcount," the company said. "Today's announcement will lead to further reductions, with the aim of bringing the cost base to a more sustainable level." In total, UBS said its investment bank "will reduce net headcount by an additional 2,000, bringing staffing levels to approximately 17,000 by year-end, a reduction of around 6,000 since the peak in third-quarter 2007." It added that the reductions "will be predominantly targeted to businesses being exited or downsized in order to protect and sustain our core client franchises." The company had said Thursday that it has been making progress reducing its problematic mortgage-related exposures and has estimated that it will produce a small profit in the third quarter.

The delinquency rate on closed-end home equity loans rose 22 basis points in the second quarter at commercial banks, according to the American Bankers Association. In the second quarter, 2.56% of home equity loans were at least 30 days past due, up from 2.34% in the first quarter. However, the overdue rate on home equity lines of credit actually fell 2 bps to 1.08% in the second quarter, according to the ABA's Consumer Credit Delinquency Bulletin. ABA chief economist James Chessen said the rise in delinquencies on home equity loans reflected continued weakness in the housing sector and helped push up the ABA's composite consumer loan delinquency rate by 6 bps to 2.68% for the second quarter.

Commercial banks, investment funds, and even a reported consortium of hedge funds, are interested in making a bid on IndyMac Bancorp of Pasadena, Calif., which is operating under a federal conservatorship. The Federal Deposit Insurance Corp., IndyMac's conservator, continues to give little guidance on the sale process. Investment bankers that have clients who want to bid said they understand the offering deadline has been moved several times because of negotiations concerning the $700 billion bailout bill. One adviser said the agency's preference continues to be a sale of the whole institution, but potential buyers are being given the option of making a "whole bank" bid or offers on certain business segments or loan pools. "The FDIC is getting more interest now," said the adviser, requesting that his name not be used. "Investors are hungrier."

The Department of Housing and Urban Development is shooting for a Nov. 1 increase in the loan limit for Home Equity Conversion Mortgages to $417,000. The new single, nationwide maximum isn't as great as some had hoped, but it will still be higher than the current $200,160 floor or the $362,790 maximum in high-cost markets. Lending interests tried to persuade the FHA to go along with the new national $625,000 ceiling on Fannie Mae-Freddie Mac loans, which took effect Oct. 1. But at this week's Mortgage Bankers Association's reverse mortgage lending conference in Atlanta, FHA Commissioner Brian Montgomery revealed that the lower figure prevailed. "We tried to convince HUD that [reverse mortgages] should be tied to the higher limit," said Daryl Hicks, vice president of communications at the National Reverse Mortgage Lenders Association, "but the lower ceiling is still going to be very helpful." Mr. Montgomery also said that HECM origination fees would be capped at $6,000. While HUD is aiming for Nov. 1, the exact effective date will not be finalized until Mr. Montgomery issues a mortgagee letter on the new loan limit.

Fannie Mae is rolling back a 25-basis-point hike in its "adverse market" delivery fee that went into effect Oct. 1, and it is telling its lenders to waive the additional charge for borrowers who have not yet closed on their loan. Freddie Mac also said it is rescinding a previously announced 25-bp hike in its "market condition" delivery fee that was due to take effect Nov. 7. Over the past year, the two secondary-market agencies have increased their fees and underwriting standards as they struggled to deal with rising delinquencies and losses. The agencies told lenders in August that they were going to double those delivery fees before the companies were placed into conservatorships by their regulator. Since then, Fannie and Freddie have been under orders to review their loans fees and underwriting standards to increase the availability of affordable mortgage credit. Fannie is evaluating underwriting guidelines, pricing, and cost in light of changing market conditions, according to chief executive Herb Allison. "As we move forward, we will seek to balance our responsibility to provide the most market support possible with our obligation to protect the company and its many stakeholders, including taxpayers," Mr. Allison said. Fannie can be found online at http://www.fanniemae.com.