Servicing

The Treasury Department is readying a legislative proposal to purchase illiquid mortgage assets from financial institutions -- and will significantly boost its MBS purchase program to provide immediate support to the mortgage market. Late Thursday, Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben S. Bernanke met with congressional leaders to discuss creation of a Resolution Trust Corp.-like entity to purchase problem mortgage assets. Legislation to make it happen could come early next week. Treasury and Federal Reserve officials and senior members of Congress have concluded that a more systematic approach to the nation's financial crisis is needed. At a news conference Friday morning, Secretary Paulson said he will propose a legislative package and work with members of Congress over the weekend to "flesh out the details." He did not provide specifics about the package, except to say the program will require hundreds of billions of dollars to remove the illiquid mortgage assets that are "weighing down our financial institutions and threatening our economy." Pressure to create an RTC-type entity to deal with the financial crisis has been building for several weeks. Meanwhile, Fannie Mac and Freddie Mac have been directed to increase purchases of their mortgage-backed securities. Treasury is doubling its MBS purchases this month from $5 billion to $10 billion. The agency unveiled its MBS program Sept. 7 when it placed the two government-sponsored enterprises into conservatorships.

The third-quarter Core Mortgage Risk Index, which forecasts the relative risk of residential loan delinquencies, stands 12% higher than it did a year ago, according to First American CoreLogic, Santa Ana, Calif. The risk index has risen for 11 of the late 12 quarters, the company said. "The CMRI is currently 55% above the base period of the first quarter of 2002, a period near the end of the last U.S. economic recession," said Mark Fleming, the company's chief economist. "Although significantly higher now than during this base period, the CMRI is likely to continue rising nationally over the next 18 months." Mr. Fleming said declining home prices are the "primary factor" in the most recent rise in mortgage risk. CoreLogic, a provider of mortgage risk assessment and fraud prevention systems, can be found on the Web at http://www.facorelogic.com.

Standard & Poor's Ratings Services has revised the CreditWatch status of most of its ratings on the AIG group of companies from negative to developing in the wake of the federal rescue of the insurance company. The affected ratings include its A-minus long-term counterparty credit ratings on American International Group and International Lease Finance Corp. and its A-plus counterparty credit and financial strength ratings on most of AIG's insurance operating subsidiaries. S&P also said it has raised the short-term counterparty ratings on AIG, its guaranteed subsidiaries, and ILFC from A-2 to A-1 and downgraded various subsidiaries' preferred shares from BBB to B. S&P credit analyst Rodney A. Clark said the actions of the Federal Reserve Bank of New York, which extended an $85 billion borrowing facility to AIG, will provide the company with "substantial relief from its near-term liquidity constraints." S&P can be found online at http://www.standardandpoors.com.

Fitch Ratings has revised its Rating Watch on American International Group Inc. and its subsidiaries from Negative to Evolving following the federal rescue of the ailing insurance giant. Fitch said it views the move as favorable overall because it "alleviates significant near-term liquidity concerns and provides a source of funding for potential future collateral requirements that are primarily derived from AIG's AIG Financial Products Corp. subsidiary." Fitch said it also believes the arrangement "provides a platform of stability for AIG's primary operating subsidiaries and significantly curtails substantive pressure on AIG to sell assets quickly to fund potential cash calls." The downside is the "effective subordination of essentially all" AIG's senior debt and hybrid instruments, Fitch said. The rating agency said AIG's "most pressing challenges" are likely to evolve from meeting immediate liquidity needs to managing higher financial leverage.

R&G Financial Corp., San Juan, Puerto Rico, has announced an agreement to settle litigation with Freddie Mac under which its subsidiaries R&G Mortgage Corp. and R-G Premier Bank of Puerto Rico will remain approved Freddie seller/servicers. The settlement, subject to approval by the U.S. District Court for the District of Puerto Rico, may be rescinded by Freddie Mac if a sale of mortgage servicing rights is not consummated within a certain period. Under the sale agreement, Banco Popular of Puerto Rico, a subsidiary of Popular Inc., San Juan, would purchase approximately $5.1 billion of third-party mortgage servicing rights from R-G Mortgage Corp. The companies can be found on the Web at http://www.rgonline.com and http://www.popularinc.com.

Rumors continued to fly Thursday morning about the possibility that Washington Mutual and Morgan Stanley could soon be sold, raising questions about the future of the mortgage finance landscape. Washington Mutual filed a notice Wednesday with the Securities and Exchange Commission indicating that TPG Capital, leader of an investment consortium that owns about half of WaMu's shares, gave up protection from equity dilution in the event of a sale or other capital-raising event. JP Morgan Chase, Wells Fargo, HSBC, and Citigroup have been mentioned as possible suitors for WaMu. Meanwhile, Morgan Stanley is reportedly in "advanced talks" to sell itself to Wachovia Bancorp and has also approached a Chinese sovereign wealth fund about making an additional investment in the firm, according to Reuters. However, some analysts are questioning the logic of a Morgan Stanley-Wachovia pairing, noting that Wachovia is already struggling to manage credit losses on a $122 billion option-ARM portfolio largely inherited from its 2006 acquisition of Golden West.

Rating agency DBRS has placed all of Washington Mutual's ratings under review with negative implications after Standard & Poor's downgraded WaMu's unsecured debt to "junk" levels. Responding to the S&P downgrade, WaMu noted that S&P's ratings for Washington Mutual Bank remain at investment-grade level. WaMu also noted that none of its unsecured debt is subject to ratings-based financial covenants that would accelerate payments or trigger early maturity or default. The company said it does not expect the rating downgrade to have a material impact on borrowings, collateral, or margin requirements. Moody's Investors Service had downgraded WaMu last week. Trading in WaMu's stock was mixed on Tuesday, with the company's share price closing at $2.32, up 32 cents on the day.

Freddie Mac is reminding its servicers that they have the discretion to provide up to a year's worth of mortgage relief to borrowers affected by Hurricane Ike. Freddie Mac gives mortgage servicers the discretion to reduce or suspend mortgage payments for up to 12 months for borrowers with Freddie Mac-owned mortgages in federally declared major-disaster areas. Servicers can offer relief to borrowers who cannot make mortgage payments because they were evacuated to avoid the storm as well as those whose homes were damaged. Servicers should assess each case individually to determine whether relief is warranted, the government-sponsored enterprise said. Freddie can be found online at http://www.freddiemac.com.

Morgan Stanley took net writedowns of $640 million in its mortgage proprietary trading business in the fiscal third quarter, but it was able to realize relatively strong overall net income of about $1.4 billion. The firm's net income was down from approximately $1.5 billion a year earlier, but market participants and observers considered it relatively strong compared with larger mortgage writedowns and poorer results at other Wall Street firms. "Despite unprecedented market conditions, Morgan Stanley's core client franchise achieved solid revenue growth, profitability, and [return on investment] this quarter," said John Mack, the company's chairman and chief executive officer.

Barclays PLC, London, has agreed to pay an estimated combined price of 1 billion pounds ($1.75 billion) for three of the bankrupt Lehman Brothers' New York-area facilities and for certain of Lehman's North American businesses -- including its partially mortgage-related fixed-income sales, trading, and research unit. Barclays said it plans to pay an estimated 800 million pounds ($1 billion) for Lehman's head office in New York as well as two data centers in New Jersey. It is also set to pay just 140 million pounds ($250 million) for Lehman's North American investment banking and capital markets businesses. The North American Lehman businesses that Barclays plans to buy have about 10,000 employees, trading assets with an estimated value of £40 billion ($72 billion), and trading liabilities with an estimated value of £38 billion ($68 billion), according to Barclays.