Servicing

The government takeover of Fannie Mae and Freddie Mac has raised as many questions as it has answered in lenders' minds about what it will be like to do business with the government-sponsored enterprises in the months ahead. A stated goal of placing Fannie and Freddie into conservatorship (an action that has made "GSE" something of a misnomer) is to ensure that money keeps flowing into the mortgage market. But the Treasury Department's plan also envisions whittling away their portfolios after a brief period of expansion. Meantime, the Federal Housing Finance Agency said it plans to tighten regulation of the companies as mandated by the law that created it. Many market observers and lenders predicted Monday that the regulators' near-term actions would reduce mortgage rates, sparking a wave of refinancings, which would benefit lenders. Further, some said, the takeover could lead to a reduction of the guarantee fees that Fannie and Freddie charge. These sources pointed to Treasury Secretary Henry Paulson's remark Sunday that the GSEs should examine the structure of such fees "with an eye toward mortgage affordability." But other observers said having the government running Fannie and Freddie could make guarantee pricing less favorable for bigger lenders. No longer concerned about volume or market share, this line of thinking goes, Fannie and Freddie will be less inclined to give breaks on guarantee fees to their bigger suppliers. David Zugheri, the president of First Houston Mortgage Ltd., a retail lender that specializes in prime conforming loans, said he expects a change from the times during which the GSEs "paid up for volume." "What they should do is look at everyone's book of business and lower the g-fees for those lenders that have less risk, not volume," he said. "They should be paying more for quality" by reducing the guarantee fees for less risky loans, he said. In an e-mail to clients on Sunday, Joe Garrett of the consulting firm Garrett, Watts & Co., wrote that Fannie and Freddie might "cut way back on offering lower guarantee fees in return for promised volume. If this were to occur, it will suddenly be much more attractive to sell directly to them, as opposed to selling to the big aggregators who get lower ... fees." Joseph P. Bowen, the chief operating officer and head of secondary marketing at Franklin American Mortgage Co., a privately held lender in Franklin, Tenn., said he expects the fees to drop. "With the federal government intervening and providing that backstop, you would anticipate that credit costs would go down and the fees would go down," he said. During the past nine months, Fannie and Freddie have imposed several loan-fee increases to reflect higher market risk and to bolster their profits. Industry trade groups complained that the increases were making mortgage credit too expensive for consumers, but GSE executives insisted the increases were needed. "Rates were artificially high because Fannie and Freddie were paying for the sins of the past with the g-fees of the future," Mike Drury, an executive vice president at the M&T Bank unit of $65 billion-asset M&T Bank Corp. in Buffalo, said Monday.By Kate Berry and Paul Muolo. Brian Collins, Harry Terris, and Steven Sloan contributed to this article.

Four certificates from three transactions issued by Terwin Mortgage Trust and backed by second-lien loans have been downgraded by Moody's Investors Service. The downgrades were as follows: Terwin Mortgage Trust 2006-4SL, class M-1, from Caa3 to C; Terwin Mortgage Trust 2006-8, class I-G, from B3 to C, and class I-M-1, from Ca to C; and Terwin Mortgage Trust 2005-13SL, class G, from Baa1 to Baa3. The downgrades were based on credit enhancement levels that were low compared with projected losses and the "continued and worsening performance of transactions backed by closed-end-second and home-equity-line-of-credit collateral," Moody's said.

Five classes of notes issued by Ischus CDO I Ltd./LLC, a collateralized debt obligation consisting largely of subprime residential mortgage-backed securities, have been downgraded by Fitch Ratings. The downgrades in the static cash flow structured finance CDO were as follows: class A-1, from AAA to A; classes A-2, from AAA to BBB; class B, from AA to BB; class C-1, from BBB to B; and class C-2, from BBB to B. Classes B, C-1, and C-2 were removed from Rating Watch Negative. The downgrades were attributed to "continued credit deterioration" in the subprime mortgage market. More than two-thirds of the portfolio, 67.6%, consists of subprime RMBS.

MetLife Home Loans, a division of MetLife Bank NA, has been assigned residential primary servicer ratings of RPS2 for prime and alternative-A product by Fitch Ratings. The ratings, which were placed on Rating Watch Evolving, reflect "the operational capabilities of the existing servicing platform" and the financial strength of the bank's ultimate parent company, MetLife Inc., Fitch said. Fitch rates residential mortgage servicers on a scale of 1 to 5, with 1 being the highest rating.

Lehman Brothers has named Eric Felder and Hyung Soon Lee as co-heads of the fixed-income area, which includes mortgage-backed securities. The two replace Andrew Morton, global head of fixed income since February 2008, who the company said is leaving the firm "to pursue other interests." Mr. Felder has been head of global credit products and municipal finance, and Mr. Lee has previously been head of capital markets, Asia-Pacific.

Downey Financial Corp., Newport Beach, Calif., has announced that the company and its subsidiary, Downey Savings and Loan Association, have agreed to consent orders with the Office of Thrift Supervision relating to regulatory capital and real estate disposition, among other things. Downey said the orders "to a large extent, formalize certain measures previously announced by the company to enhance the bank's financial strength." As a result of the orders, Downey also announced the sale of certain noncore real estate assets that produced aggregate cash proceeds of $110 million, adding that it expects to report a net pretax gain of approximately $68 million from the sale. The gain, combined with a dividend to the bank from a wholly owned subsidiary, will result in an increase of approximately $109 million in the bank's regulatory capital, Downey said. Downey chairman Michael Bozarth said the orders "reflect a number of measures that Downey has already taken and, in some cases, is close to completing." The company can be found online at http://www.downeysavings.com.

The preferred stock ratings of Fannie Mae and Freddie Mac have been downgraded by the three major rating agencies in the wake of Sunday's announcement of a federal takeover of the government-sponsored enterprises. The GSEs' preferred stock ratings were downgraded from BBB-minus to C by Standard and Poor's Ratings Services, from Baa3 to Ca by Moody's Investors Service, and from BBB-minus to C/RR6 by Fitch Ratings. In addition, S&P affirmed its long-term senior unsecured debt ratings on Fannie and Freddie at AAA and A-1-plus, respectively, with a stable outlook. It also lowered its risk-to-the-government standalone issuer credit ratings from A-minus to R (regulatory supervision) and withdrew the ratings. S&P said its affirmation of the senior unsecured debt ratings "reflects the explicit government support under the terms of the conservatorship and Treasury's establishment of a preferred stock purchase agreement," the rating agency said. Moody's affirmed its senior and subordinated debt ratings on the GSEs at Aaa and Aa2, respectively. Fitch affirmed its long- and short-term Issuer Default Ratings and senior debt ratings on the GSEs at AAA and F1-plus, respectively, and assigned a stable rating outlook to the long-term IDRs. The downgrade of the GSE preferred stock "reflects the subordination of the preferred to any Treasury interest, and interest payments are unlikely to resume in the foreseeable future," Fitch said. The rating agencies can be found online at http://www.standardandpoors.com, http://www.moodys.com, and http://www.fitchratings.com.

The government takeover of Fannie Mae and Freddie Mac appeared to be a positive for their bonds even though it had decimated their stock as of Monday morning. Multiple Wall Street firms had reported tighter spreads in agency mortgage-backed securities and debt at deadline time as Fannie and Freddie share prices each plummeted into a range around $1 per share. The Treasury's new authority to purchase MBS has reassured some investors who see it as likely to prevent the kind of extreme spread widening and volatility that upset the sector so notably in March, said Art Frank, a researcher at Deutsche Bank Securities. Senior and subordinated debt, meanwhile, have benefited from the limited net issuance and stronger government support resulting from the intervention, according to a Credit Suisse report.

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.