Servicing

R&G Financial Corp., San Juan, Puerto Rico, has announced the receipt of notices from Freddie Mac terminating the eligibility of R&G Mortgage Corp. and R-G Premier Bank to sell mortgages to Freddie or to service mortgages for the government-sponsored enterprise. The holding company said it has obtained a temporary restraining order from U.S. district court against the terminations and will appeal the actions. It also reported that Freddie Mac's notice indicated that the terminations were based on concerns about the two R&G subsidiaries' ability to continue to act as a servicer and to meet their obligations to the GSE. As of June 30, Freddie Mac servicing amounted to approximately 42% of R&G Mortgage's servicing portfolio, R&G Financial said, adding that it estimates that an additional 25%-30% of the servicing portfolio could be affected due to contractual commitments related to Freddie Mac seller/servicer status.

The Federal Deposit Insurance Corp. has approved a policy statement that should facilitate the issuance of covered bonds this fall by a few large federally insured banks and thrifts. "Covered bonds can serve as an additional source of financing for mortgage lending, and thereby offer potential benefits for banks and homebuyers," FDIC Chairman Sheila Bair said. The final policy statement assures investors that they will have quick access to the mortgage collateral of covered bonds if an institution fails and goes into an FDIC receivership. However, proponents of covered bonds are disappointed that the FDIC is limiting covered-bond issuance to 4% of total liabilities, which not only restricts issuance but essentially locks midsize banks out of the covered-bond market. The chairman acknowledged that the FDIC wants to see how the market develops before raising the cap. Ms. Bair also served notice that the FDIC may issue guidance later this year that limits a bank's reliance on secured liabilities. Federal Home Loan Bank advances and covered bonds are considered secured liabilities. The failure of the $32 billion-asset IndyMac Bank is going to be very costly for the deposit insurance fund because the thrift had $10 billion in FHLBank advances. The FHLBank has first rights to the mortgage collateral that backs the advances.

Wells Fargo's second-quarter earnings fell $500 million short of last year's level, but investors cheered as the company's quarterly revenue rose to a new high and the board approved a 10% dividend increase. Wells earned $1.8 billion ($0.53 per share) in the second quarter, down from $2.3 billion ($0.67 per share) a year earlier. Results were weighed down by a $1.5 billion increase in the provision for future credit losses. Chargeoffs in the second quarter also totaled $1.5 billion, unchanged from the level recorded in the first quarter but double that of the first quarter of 2007. Chief credit officer Mike Loughlin said the increase in credit reserve reflects "expected higher losses" in Wells Fargo's home equity group and unsecured retail loans. Wells also reported higher losses from its first-lien mortgage portfolio, which Mr. Loughlin said was expected given the continued declines in home prices. Wells Fargo originated $31 billion of retail mortgages in the first quarter, little changed from the previous year's volume, and increased the size of its servicing portfolio to $1.55 trillion. Wells Fargo's stock price rose more than 20% in morning trading on Wednesday after the results were released.

Moody's has corrected a rating action affecting securities issued by First Franklin Mortgage Loan Trust on April 21, noting that 282 tranches from 30 transactions were downgraded rather than 286 as the ratings agency originally reported. "Certain specific features of the cash waterfall and loss allocation were not fully accounted for," Moody's said. The ratings agency said the collateral backing the residential mortgage-backed securities are first-lien, subprime adjustable-rate mortgage loans. "The ratings were downgraded, in general, based on higher than anticipated rates of delinquency, foreclosure, and REO in the underlying collateral relative to credit enhancement levels," Moody's said.

U.S. Bancorp's second quarter earnings fell 18.5% compared with the year-earlier period as the company added to its loss reserves. U.S. Bancorp's net income for the second quarter fell to $950 million, compared with $1.16 billion in the second quarter of last year. Blaming "continued stress in residential real estate," the Minneapolis-based lender increased its provision for credit losses to $596 million in the second quarter of 2008, which was $111 million higher than the first quarter provision and $405 million higher than in the second quarter of 2007. The company said that declines in home and other collateral values will probably continue to push up charge-offs in the third quarter.

Fitch recorded a higher U.S. commercial real estate loan collateralized debt obligation delinquency rate in June that it said stemmed from the maturity default of one participated loan secured by a hotel/condominium development in South Florida. The CREL CDO delinquency index increased to 1.58% during the month from 1.08% the previous month. This is much higher than Fitch's commercial mortgage-backed securities delinquency rate because "the assets securing the loans in a CREL CDO are transitional in nature or highly leveraged," the ratings agency said. "In addition, the CREL DI covers 25 transactions with 340 assets while the CMBS DI covers many more (500) transactions with significantly more (42,000) loans," Fitch said. "As a result, because of the smaller number of loans in the index, one loan can have a big impact on the delinquency percentage," the ratings agency said. The CREL CDO delinquency index includes loans that are 60 days or longer delinquent, matured balloon loans and repurchased assets.

Standard & Poor's Ratings Services has lowered its ratings on 118 classes from 13 residential mortgage-backed securities transactions backed by U.S. prime jumbo mortgage collateral issued in 2005 and 2006. "The downgrades reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses," S&P said. The ratings agency said it assumes a loss severity of 23% for U.S. prime jumbo RMBS transactions.

Servicers of subprime residential adjustable-rate mortgage loans are seeing an increase in efforts to modify troubled loans, according to Moody's Investors Service survey. "Moody's found servicers had modified, as of the end of March 2008, 9.8% of the subprime ARMs with interest rate resets in the preceding 15 months," the ratings agency said. "In December, a similar survey found only 3.5% of resetting loans being modified," said Moody's. The survey included information from 10 servicers with a total servicing volume of approximately $550 billion, according to the ratings agency. Moody's said these servicers represent roughly 50% of the total U.S. subprime servicing market.

Almost a half-million Americans lost their homes to foreclosure in the first half of 2008, nearly double the same time a year ago, according to ForeclosureS.com, Sacramento, Calif."If the trend continues, we could see one million properties lost to foreclosure across the country by year-end," said Alexis McGee, president of ForeclosureS.com. The company said REO filings at the end of June, at 87,465, were up 5.35% over May, and up 15.76% compared to the second quarter of last year. The second quarter saw 244,230 filings vs. 210,980 filings for the first quarter of 2008. California leads in REO filing numbers: with 116,857 filings, followed by Florida with 43,744 filings, and Arizona with 40,639 filings. The company reported June REO filings dropped in the Midwest and the Northeast. There were 15,494 June filings, down 3.19% from May's 16,005 in the Midwest. In the Northeast, REO filings were 2,686 in June, down 7.51% from May's 2,904 filings; and in other states there were 136 June filings, up 23.64% from May's 110 filings. ForeclosureS.com said pre-foreclosure filings already have surpassed the one million mark with 1,060,187 filings as of June 30.

Impac Mortgage Holdings Inc., Irvine, Calif., has executed a letter of intent to acquire the special servicing platform of UBS AG's New York branch, partially in exchange for the issuance of UBS warrants to purchase up to 2% of Impac's stock. In addition, UBS has agreed to contribute specified balances of loans to the platform as part of a strategic alliance with Impac, according to the latter company. The deal is subject to execution of definitive agreements between the two parties and completed due diligence. "This acquisition will allow the company to take advantage of the existing market conditions to subservice for others, along with buying and then servicing ourselves currently available mortgage assets to the secondary market," said Joseph R. Tomkinson, chairman and chief executive officer of Impac. "The special servicing platform will be combined with our master servicing, default department, and real estate auction business to synergistically work together as a fully integrated platform to maximize the success of opportunistic investments in mortgage assets," he said.