Servicing

Republican congressmen are balking at supporting President Bush's $700 billion plan to exorcise bad mortgage debt from the financial system, which could jeopardize efforts to pass the emergency legislation before the election. House Financial Services Committee Chairman Barney Frank, D-Mass., has warned that Democrats are not going to pass the president's plan without Republican votes. Democratic leaders thought they had an agreement with Republican leaders on the parameters of the $700 billion bailout bill following a closed-door meeting on Thursday. But it became clear at a subsequent White House meeting that House Republicans were not on board. A group of conservative Republicans are pushing an alternative under which the government would insure mortgage-backed securities so the banks could sell them to investors. Democrats have called it "unworkable." At the urging of President Bush, key congressional leaders resumed negotiations on Friday. The president's proposal to purchase troubled mortgage assets from banks remains the centerpiece of the talks. House Financial Services Committee chairman Barney Frank, D-Mass., said he is willing to attach the Republican MBS insurance proposal to the bill to get bi-partisan support. Negotiations will continue over the weekend and Rep. Frank said he is confident they can reach an agreement on Sunday.

Key to JPMorgan Chase & Co.'s ability to take over Washington Mutual is a dramatic, $30 billion proposed writedown of WaMu's home loan portfolio, far in excess of the remaining loss rate WaMu had earlier projected on the portfolio. In addition, JPMorgan expects to write down other assets in WaMu's overall portfolio by about $1 billion. JPMorgan Chase has already unveiled plans to raise $10 billion in capital related to the acquisition of WaMu's $307 billion in assets. JPMorgan Chase priced an offering of approximately 247 million common shares at $40.50 per share Friday morning, with an option to sell up to an additional 37 million shares. WaMu's assets included $176 billion of residential mortgage loans. As of June 30, when the mortgage portfolio was slightly larger, payment-option adjustable-rate mortgages accounted for $52.9 billion of that total. Subprime mortgages accounted for $16 billion. WaMu's home loan portfolio also included $60.4 billion of home equity products.

The Office of Thrift Supervision seized control of Washington Mutual Thursday night and then handed the thrift over to the Federal Deposit Insurance Corp., which immediately sold the ailing servicing giant to JPMorgan Chase & Co. for $1.9 billion. The two parties -- which had been talking on and off about a deal over the past year -- agreed to terms after news reports began to surface that five mutual funds had formed a consortium to make a bid for WaMu. A handful of other bidders were looking at WaMu, a fact acknowledged by OTS Director John Reich, who noted that the pending $700 billion bailout of the industry affected the deal. "I think it was a significant distraction, and it probably played a role in the interest of some parties to decide not to make a bid," Mr. Reich said. The OTS said it closed WaMu Thursday because of a run on its "jumbo" deposits, particularly in California. WaMu had loan concentrations in California and Florida, which have the nation's highest foreclosure rates. "WaMu was a victim of one of the worst downturns in the housing market," said the OTS chief. The S&L is the nation's fifth-largest residential servicer, with $600 billion in housing receivables. It is also the nation's largest S&L, with $307 billion in assets.

The residential servicer ratings of Irwin Home Equity Corp., San Ramon, Calif., have been downgraded by Fitch Ratings and placed on Rating Watch Evolving. Irwin's primary servicer ratings for high loan-to-value and home equity line-of-credit products were downgraded from RPS2-minus to RPS3-plus. Fitch also assigned Irwin an RPS3-plus primary specialty servicer rating for second-lien product. The rating actions were based on "the continued financial pressures faced by IHE's parent, Irwin Financial Corp., reflecting the difficult operating environment which has severely affected IFC's earnings, asset quality, and financial flexibility," Fitch said. The rating agency can be found online at http://www.fitchratings.com.

Moody's Investors Service has downgraded the servicer quality rating of GMAC ResCap as a master servicer from SQ2 to SQ2-minus. The rating remains on review for possible further downgrade. Moody's said the downgrade reflects increasingly difficult market conditions that are putting stress on the servicing operations. While the master servicing operations have remained profitable, Residential Capital LLC (which houses the GMAC ResCap master servicing operations) and GMAC "continue to be under significant financial pressure," the rating agency said. On Sept 2, GMAC and ResCap announced plans to significantly downsize the ResCap operations. The ratings of both companies remain under negative outlook. As GMAC ResCap continues to reduce staff and outsource master servicing functions to cut costs, Moody's said it is "uncertain about GMAC ResCap's willingness and ability to continue investing in the platform." The rating agency can be found online at http://www.moodys.com.

The possibility of a partial sale of Washington Mutual Inc. has prompted downgrades of WaMu by Standard & Poor's Ratings Services and Fitch Ratings. S&P downgraded WaMu's counterparty credit rating from BB-minus/B to CCC/C, though it affirmed the BBB/A-3 counterparty credit rating on Washington Mutual Bank, citing "the breadth of its retail franchise." S&P attributed the downgrade to "the increased likelihood that a potential sale of the company may not involve the whole company, which increases the risk of default for holding company creditors." Fitch downgraded WaMu's long-term Issuer Default Rating from BBB-minus to B-minus and placed the company and its subsidiaries on Rating Watch Evolving, citing "the heightened uncertainty associated with WaMu's debt obligations in light of the difficult market conditions and increasingly limited options to bolster capital." A partial sale "would likely be detrimental to WaMu's holding company creditors and potentially to unsecured debtholders at the bank level because they are effectively subordinated to depositors and the considerable amount of secured financing," Fitch said.

Some 302,593 mortgages backed by Fannie Mae and Freddie Mac (1% of all the notes they guarantee) are 90 days or more past due, placing them in the "seriously delinquent" category. According to new figures released by the Federal Housing Finance Agency, Fannie and Freddie together have 30.4 million loans in their guarantee portfolio. In testimony Thursday before the House Financial Services Committee, Freddie Mac's new chief executive, David Moffett, said his company has increased the financial incentive it pays seller/servicers to participate in a new Mass Modification program for troubled borrowers. Mr. Moffett maintains that the company will help 82,000 borrowers avoid foreclosure this year.

House and Senate Democrats have agreed on most details of a $700 billion bailout plan for the credit and mortgage industries, including a provision that will allow bankruptcy judges to reduce ("cram down") the outstanding balance on troubled mortgages. The cramdown proposal is vehemently opposed by the mortgage banking industry. As of MortgageWire's deadline, Democrats were meeting with Republicans on the legislation. Among other things, the Democratic version of the bill would allow the Treasury to spend an unspecified portion of the money prior to going before an oversight board for further spending allowances. The money will be used to buy troubled mortgage-backed securities from financial service companies (including depositories) of all sizes. Republicans and the White House support Democratic language that would limit compensation for executives whose firms sell into the program.

The master servicer rating of The Bank of New York Mellon has been upgraded from RMS2-plus to RMS1-minus by Fitch Ratings. Fitch attributed the action to BNYM's "strong oversight and monitoring of its primary servicers, its continued investment in enhancing its technology, and its increasing use of automation." The company's master servicing operation is based in New Albany, Ohio. Fitch rates residential servicers on a scale of 1 to 5, with 1 being the highest rating. The rating agency can be found online at http://www.fitchratings.com.

Nominal home prices were down 10.9% nationally in July from the level recorded a year earlier, according to the latest LoanPerformance Home Price Index. Los Angeles-Long Beach-Glendale topped the index's list of statistical areas experiencing 12-month home price declines, recording a 27.95% decrease. Oakland-Fremont-Hayward (Calif.) ranked second with a 27.28% decline, and Riverside-San Bernardino-Ontario (Calif.) finished third at 26.93%. "The recent price trend is similar to the Massachusetts and Texas house price declines in the 1980s and 1990s that took approximately two years to bottom out," said Mark Fleming, chief economist of First American CoreLogic, the Santa Ana, Calif.-based company that compiles the index. "In both cases there was stabilization in the rate of decline before the lengthy recovery in price levels." The LoanPerformance HPI provides monthly home price indices and median sales prices covering 7,575 ZIP codes and 676 counties in all 50 states and the District of Columbia, the company said. First American CoreLogic can be found online at http://www.facorelogic.com.