Servicing

Before the Senate Banking Committee approves a $700 billion bailout of the credit and mortgage markets, some of its members want assurances that the government will not overpay for subprime MBS -- plus promises that taxpayers will get warrants in companies that sell to the government. At a hearing Tuesday -- attended by every senator on the committee as well as a noisy faction from ACORN that was silenced by committee Chairman Christopher J. Dodd, D-Conn. -- several elected officials wanted to know at what price the government would purchase mortgage-backed securities. "How will the assets be priced?" asked Sen. Robert Menendez, D-N.J. "If the seller doesn't like the price, will the taxpayer be asked to pay a premium?" The question was aimed at Treasury Secretary Henry Paulson, who has been putting together the bailout plan over the past few weeks. Committee members expressed dismay at having to spend so much of the taxpayers' money to help bail out Wall Street. "It's financial socialism," said Sen. Jim Bunning, R-Ky. "And it's un-American."

Fitch Ratings is the first rating agency to rate mortgage loans based on VantageScore, the algorithm created by the three credit bureaus to compete with Fair Isaac. "The mortgage crisis has not only shown that a multitude of factors influence the performance of high risk loans, but has also underscored the need for an improved generic consumer scoring model against which mortgage lenders can more reliably make their loans," said group managing director Huxley Somerville, who heads Fitch's U.S. RMBS group. "Built using data that includes the dramatic rise in consumer indebtedness in recent years and regularly revalidated to ensure the model's continued predictiveness, VantageScore has shown to be more accurate than FICO because it excludes the use of authorized trade lines." The latest version of FICO had originally excluded authorized trade lines, but Fair Isaac said the feature is being added back into FICO 08 because of concerns related to the Equal Credit Opportunity Act. Fitch has fully incorporated VantageScore into ResiLogic 2.1, a quantitative model that provides credit risk analysis at the individual loan and pool level for residential mortgage loans.

The Summit County [Ohio] Port Authority has voted to issue $12.5 million in tax-exempt bonds to help homeowners in the region who are facing foreclosure, according to American Homeowner Preservation Inc., Akron, Ohio. The authority approved the use of the bonds to help finance the work of AHP Ohio, a new nonprofit organization that is now accepting applications from distressed homeowners in the Summit County region. AHP Ohio said its program offers qualified homeowners who are behind on their payments and owe more than their house is worth a way of selling their homes and leasing them back at affordable monthly payments. The organization can be found on the Web at http://www.ahpoh.org.

Credit union leaders were working through the weekend to ensure that the massive government bailout of the mortgage industry includes their industry, too -- especially corporate credit unions, which are treading water amidst huge portfolios of underwater mortgage-backed securities. According to a report in Credit Union Journal, a sister publication to National Mortgage News, corporate CUs have accrued some $10 billion in unrealized losses on their mortgage-backed securities -- more than the capital of the entire corporate network. Almost every corporate CU is holding underwater mortgage securities, and more losses are expected to come to light this week and next as the corporates report their August financials to their members, the newspaper reported.

Under legislation now being debated on Capitol Hill, any financial institution headquartered in the United States can be a seller of mortgage-related assets to the Treasury, which will be the "market maker" and sole determiner of price. On Monday, Treasury and Bush administration officials continued their talks on an estimated $700 billion bailout of the capital and mortgage markets. Meanwhile, financial service executives were trying to figure out the most important part (for them) of the historic bailout plan: at what price will Treasury buy their troubled assets? "The biggest outstanding question is how the price of purchased assets will be determined," said Merrill Lynch analyst Akiva J. Dickstein in a new research report. "While the government will not purchase assets at par, the scope of the program plus the fact that the government is unlikely to demand the same yields as private sector purchases means that spreads are likely to tighten." As negotiations on the bill continue, there is talk that the Treasury might liberalize its guidelines and eventually become a purchaser of assets backed by credit cards, automobiles, and commercial real estate. Meanwhile, over the weekend, Goldman Sachs and Morgan Stanley -- the last two of the remaining independent investment banking giants -- said they would transform themselves into bank holding companies, a move that will allow them to accept more bank deposits but will subject them to greater regulatory scrutiny. Goldman owns Litton Loan Servicing, one of the largest "scratch-and-dent" servicers in the United States. Morgan owns Saxon Mortgage, which services $50 billion in subprime loans.

Fitch Ratings has placed Washington Mutual Inc., Seattle, which has been rumored to be on the auction block, on Rating Watch Evolving. Fitch attributed the action to "recent market developments," including the waiver by TPG Capital and related entities of price reset rights under an investment agreement (and related warrants) associated with their June 2008 investments. "Because the waiver removes an important potential hurdle to the sale of WaMu, Fitch believes it signals a much higher probability of an imminent transaction which, depending upon the buyer and the specifics of the transaction, could result in the upgrade or downgrade of [WaMu] and related subsidiaries," the rating agency said. Fitch can be found online at http://www.fitchratings.com.

Several companies -- VIST Financial Corp., Bank of the James Financial Group Inc., and Torchmark Corp. -- have announced that they will likely take impairment charges against their holdings of preferred stock in Fannie Mae and Freddie Mac. VIST, based in Wyomissing, Pa., said it held preferred stock in the government-sponsored enterprises with a total cost of $7.3 million as of June 30. The company said it expects to record a noncash other-than-temporary impairment charge of up to $7.3 million on the stock in the third quarter. Bank of the James Financial, based in Lynchburg, Va., reported that it held GSE preferred stock with a par value of $3.9 million as of Sept. 18, and noted that the shares were trading at less than 5% of par value. It estimated that it will take a noncash other-than-temporary impairment charge of $1.7 million to $1.9 million for the third quarter. Torchmark, based in McKinney, Texas, said it held about $2 million in GSE preferred stock, plus $207 million in the senior and subordinated debt of American International Group, Lehman Brothers, and Washington Mutual, as of Aug. 31. "In the unlikely event that the company determines the entire amount of these investments to be other than temporarily impaired, the after-tax impairment cost would be $136 million," Torchmark said. The companies can be found online at http://www.vistfc.com, http://www.bankofthejames.com, and http://www.torchmarkcorp.com.

Over 25% of mortgage delinquencies and foreclosures involve seniors, according to a study by AARP, and older homeowners with subprime mortgages are 17 times more likely to end up in foreclosure than their peers with prime mortgages. "The public perception is that older Americans are financially secure in their homes," said Susan Reinhard, director of AARP's Public Policy Institution. "But the reality is that while many are in fact secure, hundreds of thousands are not and face unsettling uncertainty over their futures as homeowners." The AARP study found that 28% of delinquencies and foreclosures that occurred during the second half of 2007 involved people 50 years and older. "Over 684,000 older Americans were either delinquent or in foreclosure at the end of 2007," the study says. "Of these, nearly 50,000 were in foreclosure or had already lost their homes." The study also picked up disparities between minorities and whites. Foreclosure rates for senior African-American and Hispanic homeowners were 0.51%, compared with 0.19% for senior Caucasians. African-Americans seniors hold over 6.8% of first mortgages in this age group, but represent 14.4% of the foreclosures among seniors.

The Securities Investor Protection Corp., which maintains a special fund to help investors at failed brokerage firms, has announced that it will file a proceeding placing Lehman Brothers Inc. in liquidation. After "extensive discussions and consultation" with representatives of the firm and its parent company, as well as representatives of the Securities and Exchange Commission, the Federal Reserve, and other federal agencies, SIPC said it has decided the action is "appropriate for the protection of customers" and to facilitate the transfer of customer accounts and an orderly unwinding of the brokerage firm's business. A hearing on the sale of the business to Barclays Capital Inc. was scheduled for Sept. 19.

Efforts by House and Senate banking committee leaders to reach a deal on a flood insurance reform bill have reached an impasse, and they may settle for a simple seven-month extension of the National Flood Insurance Program. "I am disappointed that a permanent solution is not before us, but we can and should extend the program while we work on that final bill," said House Financial Services Committee Chairman Barney Frank, D-Mass. Rep. Frank has introduced a bill that provides for a seven-month extension. The current authority to run the NFIP expires Sept. 30. The House and the Senate have passed separate flood insurance reform bills. The House bill provides new coverage for wind damage, which has complicated negotiations.