Servicing

The Federal Deposit Insurance Corp. -- which five days ago thought it had sold the ailing Wachovia Corp. to Citigroup -- has a conundrum on its hands: back Citi's original bid (which had federal aid) or allow the Charlotte, N.C.-based banking giant to be bought by Wells Fargo, which isn't asking for any type of government assistance. As of MortgageWire's deadline, the situation -- to say the least -- was fluid. Citigroup was threatening legal action while demanding that its original purchase go through as planned. The FDIC issued a statement saying it stood behind the original purchase agreement (which it helped engineer) but also said it will review "all proposals" with an eye toward coming up with a resolution "that best serves" the public interest." (The Citi deal values Wachovia at $1 a share, while the Wells bid amounts to about $7.) The trouble started Friday morning when Wells Fargo unexpectedly announced that it was buying Wachovia with no federal assistance whatsoever. The deal, if it goes through, will help Wells battle Bank of America for control of the residential lending and servicing sectors. With Wachovia under its belt, Wells would control 17.65% of the $9.6 trillion housing receivables market, compared with Bank of America's 21.06%. In lending, Wells/Wachovia would have an origination share of 17.73% vs. BoA's 19.99%. (The market share figures are based on June 30 data and take into account BoA's July 1 purchase of Countrywide Home Loans.) Even though the FDIC put no money into the original Citi-Wachovia purchase deal, it was on the hook for potential losses on Wachovia's payment-option ARM portfolio. Wells is buying Wachovia outright in a stock deal valued at $15 billion.

Asset flippers beware -- the Treasury Department doesn't want you to profit unjustly by selling your mortgage bonds to Uncle Sam. According to details of the financial rescue bill, investors that want to sell assets to the Treasury cannot do so at a price higher than the one they bought them at. In other words, if an investor buys discounted mortgage-backed securities from a seller, he cannot turn around and unload the bonds to Treasury at a higher price. However, the legislation leaves a loophole: if a seller of bad assets took control of mortgage bonds through a merger/acquisition or bought them out of a conservatorship, they are exempt from the Treasury's "unjust enrichment" clause. The bill also allows Treasury to aid ailing depositories of less than $1 billion in assets if their capital positions were damaged by their investments in preferred stock issued by Fannie Mae and Freddie Mac. The legislation stipulates that the executive in charge of the Troubled Asset Relief Program must be an assistant secretary of the Treasury appointed by the president.

The Issuer Default Ratings of Emigrant Bancorp Inc. and its subsidiaries have been downgraded by Fitch Ratings, which cited concerns about Emigrant's capital position and expected losses. The long-term IDR of the parent company was downgraded from BBB to BB-plus, and its short-term IDR was downgraded from F2 to B. The comparable downgrades to its subsidiaries were from BBB to BBB-minus and from F2 to F3, respectively. "While Fitch expects capital to meet the definition of 'well capitalized', both tangible and regulatory capital ratios remain under considerable pressure due to expected recognition of losses in its investment portfolio," the rating agency said. Fitch can be found online at http://www.fitchratings.com.

Andrew Davidson & Co., New York, has announced a new service, Breakpoint Analysis, that it describes as a flexible means of assessing the credit risk of mortgage bonds. Using a distance-to-default measure, Breakpoint Analysis "provides what is in essence a dynamic and timely alternative to a credit rating of the asset as an up-to-date measure of credit risk," AD&Co said. The company said a Breakpoint Ratio is the ratio of the collateral losses required to cause the first dollar of a bond's principal writedown to the projected loss in the base-case economic scenario. The ratio adjusts dynamically to changes in home prices, interest rates, home price forecasts, delinquencies, and deal structure, providing a measure that reflects the current distance to default of each bond. "Credit rating agencies provide a valuable service in addressing structural and legal issues in securitization and establishing initial ratings which reflect a broad range of possible economic environments," Andrew Davidson said. "Breakpoint Analysis adds to this by providing an up-to-date, numerical assessment of changes in credit risk due to changing collateral performance and market conditions. This numerical measure can be used to better understand the evolution of credit risk in a portfolio."

Freddie Mac is getting a "positive" response from a pilot program that is aimed at getting hard-to-reach borrowers who are headed toward foreclosure to consider a loan modification offer. "In this new initiative, servicers solicit seriously delinquent borrowers with a pre-approved modification plan," Freddie chief executive David Moffett recently told a congressional panel. "Notwithstanding the continued difficultly of contacting many borrowers, early results are positive." Freddie is offering to reduce the interest rate on their mortgage by two percentage points and extend the term to 40 years. The mortgage giant launched the "mass modification" pilot program in April.

Deutsche Bank -- once a key player in subprime financing -- believes that as soon the Treasury Department begins purchasing troubled mortgage assets, liquidity will return to the market. In a new research report, chief economist Joseph LaVorgna predicts that even if the Treasury buys a "small amount" of assets, "liquidity will return." He says he believes that, in time, it could lead to a dramatic improvement in pricing. He cautions, however, that Treasury's Troubled Asset Recovery Program could run into problems if financial institutions are valuing their illiquid assets "meaningfully above the government's eventual purchase price." Deutsche Bank says if that's the case, sellers (banks, thrifts, and investment banks, among others) might not participate, defeating the purpose of the program, or they would face significant markdowns as they revalue their assets at the new price, which could raise solvency concerns.

Just after 9:30 Wednesday night, the full Senate passed a $700 billion rescue plan to revive the credit and mortgage markets. The final tally was a lopsided vote of 74 to 25. The passage came two days after Republicans -- fearing a voter backlash at the polls -- torpedoed the House version of the bill. However, senators stuffed their version of the bailout legislation with tax breaks and other sweeteners. House members were slated to return to work Thursday redrafting the bill that was defeated on Monday. It appears that mortgage "cramdown" language will not be included, but some liberal members of Congress are still holding out hope that it may be.

The short-term ratings on six issues of variable-rate single-family mortgage bonds that have liquidity support from Lehman Brothers Commercial Bank have been downgraded from F1-plus to F3 by Fitch Ratings. The affected bonds are: Idaho Housing and Finance Association Single Family Mortgage Bonds Class I Variable Rate Bonds, series 2008 A and 2008 B; and Utah Housing Corp. Single-Family Mortgage Bonds (Master Indenture Dated May 1, 2000) Class I Variable Rate Bonds, series 2006 B, 2006 C, 2006 D, and 2006 E. All the bonds maintain long-term ratings of AAA, and the F3 short-term ratings are on Rating Watch Negative. The management at both housing issuers report that they are seeking replacements for the LBCB liquidity facilities, Fitch said.

The risk of home price declines in the nation's 50 largest housing markets has been "significantly heightened" by rising foreclosures and unemployment, according to PMI Mortgage Insurance Co., Walnut Creek, Calif. According to the PMI U.S. Market Risk Index for Fall 2008, the risk of price declines rose by more than 10% in 16 of the nation's top 50 metropolitan statistical areas, primarily in areas that experienced major house price increases during the housing boom. "The risk of future home price declines increased in 94% of all 381 MSAa in the country this quarter," said David W. Berson, chief economist and strategist for The PMI Group. "The majority of these increases aren't statistically significant -- in many cases, risk increased by less than 10% -- but risk did increase by a significant amount, as much as 30% or more, in some states and MSAs where foreclosures and unemployment increased significantly." PMI can be found online at http://www.pmigroup.com.

Farmer Mac has also announced a $65 million capital infusion from six financial institutions that it says will restore its capital position and meet regulatory requirements. The investors are: AgFirst Farm Credit Bank; AgriBank FCB; CoBank ACB; Farm Credit Bank of Texas; U.S. AgBank FCB; and Zions Bancorporation. "This capital infusion, made by investors who know us well with the full support of our regulator, meets our commitment to satisfy regulatory requirements and support our plans to further our congressional mission for the benefit of farmers, ranchers, and rural residents," said Lowell Junkins, acting chairman of Farmer Mac's board.