Servicing

Shares of the government-sponsored enterprises dropped to new lows Monday after the market digested the Treasury Department's proposed bailout, which would inject funds into Fannie Mae and Freddie Mac but significantly dilute the interests of shareholders. Fannie Mae's shares dropped a whopping 89.6% in Monday's trading, closing down $6.31 at $0.73. Freddie Mac was in similar straits, with shares trading at $0.78 after falling 82.8%, or $4.22. Ironically, the rest of the market benefited from news of the rescue plan. The Dow Jones industrial average was up nearly 290 points, over 2.5%, at the close.

If the government-sponsored housing finance enterprises survive, they will do so as a pale reflection of their former selves, an ex-Fannie Mae executive believes. "They will have a smaller, narrower role, if they are going to have a role at all," Adolfo Marzol of Marzol Enterprises, Washington, said at the Consumer Bankers Association's annual Home Equity Lending Conference in Austin, Texas. The GSEs' reduced presence, he told the meeting, will leave the door open for banks and thrifts to return to a much more central position in the mortgage market, a place they all but ceded years ago to mortgage bankers and brokers. It may be business as usual for the GSEs over the next 18-24 months, he said. But "three or four years from now," the market will be totally different, he said. Mr. Marzol, who called the federal takeover of Fannie Mae and Freddie Mac a "monumental" event, spent 10 years at Fannie, including six as executive vice president and chief credit officer. In his last year at the GSE, he served in an interim capacity as the company's chief risk officer.

On Sunday morning the new GSE regulatory agency placed congressionally chartered mortgage giants Fannie Mae and Freddie Mac into separate conservatorships, as the government committed $100 billion to each while removing their CEOs and laying the groundwork for a radical and historic restructuring of the entire U.S. mortgage market. As part of the restructuring plan for the government-sponsored enterprises, the Treasury Department is providing capital and funding support in an effort to boost investor confidence in Fannie's and Freddie's $5.2 trillion worth of debt and mortgage-backed securities. "Monday morning the businesses will open just as usual, only with stronger backing for the holders of MBS, senior debt, and subordinated debt," said James Lockhart, director of the Federal Housing Finance Agency. The Treasury has committed to purchase new Fannie and Freddie MBS, a move that will add liquidity to the mortgage bond market. It will purchase $5 billion worth of agency MBS in September alone. The FHFA dismissed Fannie chief executive officer Daniel Mudd and Freddie chairman and CEO Richard Syron. The two men will stay on in transition roles. Herb Allison, a former vice chairman at Merrill Lynch, was named CEO of Fannie, and David Moffet, former vice chairman of U.S. Bancorp, will lead Freddie. The new CEOs will be charged with examining Fannie's and Freddie's "guarantee fee structure with an eye toward mortgage affordability," Treasury Secretary Henry Paulson said. "The primary mission of these enterprises now will be to increase the availability of mortgage finance," he said. The FHFA director placed the GSEs in conservatorships due to their ailing financial condition and their deteriorating ability to support the mortgage market. Secretary Paulson made conservatorship a prerequisite for providing the two GSEs with quarterly capital infusions to ensure that they maintain a positive net worth. "I support the director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs," Mr. Paulson told reporters Sunday morning. In agreeing to a conservatorship, the GSEs each issued $1 billion in senior preferred stock to the Treasury. With each capital infusion, the Treasury will accumulate more preferred stock. The Treasury also will be issued warrants that give the agency the right to purchase 79.9% of the common shares in each GSE. Meanwhile, the GSEs can increase their MBS purchases by about $100 billion each. But the investment portfolios are capped at $850 billion through 2009. The senior preferred stock covenants also require the GSEs to reduce their portfolios by 10% a year starting in 2010 until the portfolios reach $250 billion. The new conservatorships will not pay dividends on common or preferred stock. The Treasury secretary advised banks and thrifts with large exposures to GSE common and preferred shares to work with their regulators in developing a capital restoration plan.

In response to a story on loan production at GMAC's Residential Capital LLC unit, a company spokeswoman has asked to clarify her statements to MortgageWire. Her statement follows: "ResCap is not making predictions about how our loan volumes will be impacted due to the closure of the retail and wholesale channels. However, we are excited about continuing to originate loans through our ditech.com, GMAC Mortgage direct and correspondent channels." Originally, the spokeswoman said that despite the elimination of the firm's broker channel and traditional retail branches, origination volumes would not decline by much.

Five classes of notes issued by Independence V CDO Ltd., a collateralized debt obligation consisting largely of subprime and alternative-A residential mortgage-backed securities, have been downgraded by Fitch Ratings. The downgrades were as follows: class A-1, from BBB-minus to CCC; classes A-2A and A-2B, from B to C; class B, from CCC to C; and class C, from CC to C. All five classes were removed from Rating Watch Negative. The downgrades were attributed to "significant collateral deterioration" in subprime and alt-A RMBS. More than half of the portfolio, 62.6%, consists of subprime RMBS, while the remainder consists of alternative-A RMBS, 13.3%; commercial MBS, 10.1%; and prime RMBS, CDOs, and other asset-backed securities, 14.0%.

Thirteen certificates from Saxon Asset Securities Trust 2007-3 have been downgraded by Moody's Investors Service. Four of the downgraded certificates will remain on review for possible further downgrade, and six others have been placed on review for possible downgrade. Moody's said the downgrades, in general, were based on higher-than-expected rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels.

The ratings of 135 tranches from 12 alternative-A transactions issued by Washington Mutual have downgraded by Moody's Investors Service. Four of the downgraded tranches remain on review for further possible downgrade. In addition, the ratings on 16 senior tranches were confirmed. The downgrades were attributed, in general, to higher-than-expected rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels. The collateral consists primarily of first-lien, alternative-A mortgage loans. Moody's can be found on the Web at http://www.moodys.com.

The increase in troubled residential mortgages and construction loans is far from over, and more banks will run into problems and fail this year, according to Sheila Bair, chairman of the Federal Deposit Insurance Corp. "You simply must accept that the credit downturn is far from over," the FDIC chairman told the Florida Bankers Association. "It's a tough slog, but there's no easy way out." Ms. Bair stressed that it is critical for banks and thrifts to get control of their balance sheets, raise capital, and pay particular attention to liquidity. "Asset quality problems are putting pressure on the funding side of the balance sheet" Ms. Bair said. And she noted that liquidity problems have contributed in "varying degrees" to the failures of 10 banks this year. The FDIC chairman also stressed that the deposit insurance fund is "strong" and that she does not expect the FDIC will need to borrow against its line of credit with the U.S. Treasury to cover additional losses. To ensure that that doesn't happen, the FDIC board will consider a premium increase in October, she said.

Close to 30% of all subprime residential mortgages were delinquent or in foreclosure at midyear, according to exclusive survey figures compiled by National Mortgage News and the Quarterly Data Report. NMN found that 29.92% of all outstanding subprime loans were delinquent. (Included in the figure is a foreclosure rate of 10.86%.) The findings are based on surveys filed by nine different subprime servicers with a combined portfolio of 2 millions loans. The firm with the highest delinquency rate was Aurora Loan Services, Littleton, Colo. (40.66%). American Home Mortgage Servicing, Irving, Texas, had the lowest rate, 23.84%. Many of the nine firms are "scratch-and-dent" specialists that receive fee income from investors for handling their bad loans. NMN's subprime findings were close to those released by the Mortgage Bankers Association on Friday. The MBA found that 30.48% of subprime loans were delinquent, including 11.81% that were in foreclosure.

The percentage of loans that were delinquent or in foreclosure rose to a record 9.16% during the second quarter, an all-time high. During a conference call with reporters, Jay Brinkmann, the new chief economist at the Mortgage Bankers Association, said that both the overall delinquency rate of 6.41% and the foreclosure inventory of 2.75% represented record highs for the MBA survey. The foreclosure inventory is up 135 basis points from the level recorded a year earlier and 28 bps from that of the first quarter. Mr. Brinkmann said the deterioration in credit quality continues to be driven by conditions in California and Florida. Those two states accounted for 39% of all foreclosures started in the second quarter and 73% of the increase in foreclosures, he said. The MBA can be found online at http://www.mortgagebankers.org.