Servicing

An attorney who spoke at the Western States Loan Servicing Conference in Las Vegas predicts that the Federal Trade Commission will produce a "significant enforcement action" involving a major mortgage servicer within the next several months. Anand Raman, a partner at Skadden, Arps, Slate, Meagher & Flom, said the FTC has broad authority to scrutinize loan servicing practices under its broad authority to address "unfair and deceptive trade practices," and that even practices that are not "manifestly illegal" may get servicers into trouble. Issues the FTC and other regulatory agencies are likely to investigate include internal documentation, monthly billing statement information, and customer service, he said, noting that regulators are under political pressure to get tough with the mortgage industry. "There is a lot of pressure to bring home scalps," Mr. Raman said during a panel session at the conference, which was sponsored by the California Mortgage Bankers Association. "Unfortunately, those servicers that are not operating at a best-practices level make easy targets."

Thirty-two classes of notes issued by six collateralized debt obligations linked to subprime residential mortgage-backed securities have been downgraded by Fitch Ratings. All but one of the downgraded classes were removed from Rating Watch Negative. The affected securities are as follows: eight classes from Lexington Capital Funding Ltd./Inc., a cash flow structured finance CDO; six classes from Blue Heron Funding II Ltd.; six classes from Ischus CDO II Ltd./LLC, a cash flow structured finance CDO; five classes from NovaStar ABS CDO I Ltd., a cash flow structured finance CDO; four classes from Lexington Capital Funding III Ltd./LLC, a hybrid cash and synthetic CDO; and three classes from Mulberry Street CDO Ltd./Corp., a cash flow structured finance CDO. The downgrades were attributed to collateral deterioration in subprime RMBS, as well as (in the cases of Lexington III and Mulberry Street) alternative-A RMBS and (in the cases of Lexington, Blue Heron, and Mulberry Street) structured finance CDOs with underlying exposure to subprime RMBS.

Thirty-five classes from four Structured Adjustable Rate Mortgage Loan Trust transactions backed by prime jumbo mortgage collateral issued in 2005 have been downgraded by Standard & Poor's Ratings Services. In addition, S&P affirmed its ratings on 62 other classes from the series. The downgrades of four classes were attributed to principal writedowns due to credit support depletion, and the remaining downgrades "reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses," the rating agency said.

The Issuer Default Ratings of Chevy Chase Bank FSB, Bethesda, Md., have been downgraded by Fitch Ratings, partly for mortgage-related reasons. The long-term IDR was downgraded from BBB-minus to BB-plus, and the short-term IDR was downgraded from F3 to B. The downgrades were based on the "continued deterioration" of asset quality, as nonperforming assets rose from 1.7% of loans and real estate owned at Dec. 31, 2007, to 4.2% at June 30, Fitch said. "In March 2008, Fitch affirmed the company's ratings with a negative outlook that included the expectation of continued deterioration," the rating agency noted. "However, the pace in recent periods exceeded the initial expectation." Fitch noted that the bank has discontinued the origination of payment-option adjustable-rate mortgages, which had been "its primary lending product."

John A. Vella has been named senior vice president and managing director of the Mortgage Special Operations business of Residential Capital LLC, a Minneapolis-based subsidiary of GMAC Financial Services. Mortgage Special Operations provides subservicing and asset management for high-risk loans in the United States, Canada, and the United Kingdom. ResCap said it is expanding the business to "align with a growing demand from hedge funds, investment bankers, and other institutional investors for mortgage servicing and loss mitigation of their loan portfolios." Mr. Vella, who will be based in California, has more than 24 years of experience in the mortgage industry, including senior management experience at Household Automotive, Option One Mortgage, Freddie Mac, and the Federal Deposit Insurance Corp. He was most recently president and chief executive officer of EMC Mortgage. ResCap can be found on the Web at https://www.rescapholdings.com.

BankUnited Financial Corp., Coral Gables, Fla., has reported a mortgage-related net loss of $117.7 million ($3.35 per share) for the second quarter, compared with net income of $23.2 million ($0.62 per share) a year earlier. The loss was chiefly attributable to a $130 million provision for loan losses. Alfred R. Camner, the company's chairman and chief executive officer, said the quarter was "a mix of strong results from our core banking operations offset by continued deterioration in the mortgage portfolio." Mr. Camner pointed to the company's launch of a Mortgage Assistance Program to provide relief to borrowers with payment-option adjustable-rate mortgages. "We will be reaching out to thousands of option ARM borrowers, the largest portion of which are in Florida, to place them into traditional mortgage products, including government agency loans," he said. "We intend to waive prepayment fees and to create additional incentives for these borrowers to make the transition both easy and affordable." The company can be found online at http://www.bankunited.com.

Mortgage-related bond insurer Assured Guaranty Ltd., Hamilton, Bermuda, recorded $545.2 million in net income during the quarter ended June 30 but noted that the higher earnings stemmed primarily from accounting gains that are expected to fall to zero over time. Like some of its peers, the company credited an "increase in after-tax unrealized gains on credit derivatives" as the principal reason for a notable increase in net income in the most recent earnings period. "The company's credit derivatives are generally held to maturity, and management expects that the unrealized gain or loss on a credit derivative will reduce to zero as the exposure approaches its maturity date, unless there is a payment default on the exposure," Assured Guaranty said.

The Royal Bank of Scotland Group PLC took a loss of more than 690 million pounds ($1.32 billion) in the first half of the year due to massive, partially mortgage-related writedowns that were largely expected. The corporate parent of U.S. investment banking subsidiary RBS Greenwich Capital took 5.9 billion pounds ($11.3 billion) in writedowns during the period. While the writedown total roughly matched April estimates, the portion of it stemming from credit valuation adjustment exposure to monoline bond insurers was higher than expected, the company said. "The results we have published today demonstrate progress in a number of important areas, and it is all the more unsatisfactory, therefore, that they record a loss as a result of our credit market writedowns," said Fred Goodwin, the group's chief executive. "We are determined to ensure that the inherent strengths of the group's diverse business model are not obscured in this way again."

Standard & Poor's Ratings Services has downgraded its subordinated debt and preferred stock ratings on Freddie Mac from AA-minus to A-minus and its risk-to-the government rating from AA-minus to A. S&P also affirmed its senior unsecured debt rating of AAA/Stable/A-1-plus on Freddie Mac. The ratings were removed from CreditWatch Negative, but the outlook is negative. "The lower risk-to-the-government, subordinated debt, and preferred stock ratings reflect Freddie Mac's pressured capital position in the face of higher operating losses," said S&P credit analyst Victoria Wagner. "....Higher credit expenses are the driver of net operating losses, as Freddie Mac is not immune to the weak housing markets." The lower subordinated debt and preferred stock ratings reflect "heightened subordination risk," S&P said, noting that recent housing legislation creates a new regulatory structure with receivership powers that would place nonsenior creditors at a greater risk of nonpayment, especially on preferred stock dividends.

Following in Fannie Mae's footsteps, Freddie Mac is doubling its market risk delivery fee to 50 basis points, which will be added to other delivery fees currently in place starting Nov. 7. "We are increasing the Market Condition delivery fee from 25 basis points to 50 basis points," Freddie says in an Aug. 8 bulletin to lenders. Like its fellow secondary-market agency, Freddie is cushioning the delivery fee hike for borrowers with loan-to-value ratios of 85% to 95% and credit scores above 680 by reducing their existing delivery fees by 25 bps or giving them a 25-bp credit. Freddie also notified its lenders about increases in its delivery fees for investor loans and said it will stop purchasing cash-out refinancings with LTVs above 85% starting Nov. 7. In addition, the agency raised its delivery fees on A-minus loans from 3.25% to 4.00% for borrowers with lower credit scores. On Aug. 4, Fannie Mae said it would double its "adverse market" delivery fee to 50 bps effective Oct. 1. Freddie Mac can be found on the Web at http://www.freddiemac.com.