Servicing

Shares of Fannie Mae and Freddie Mac fell sharply Monday after an analyst said they may have to raise more capital than anticipated. Freddie Mac's share price fell $2.59, or 18%, to close at $11.91. Fannie Mae's shares fell $3.04, or 16%, to close at $15.74. Analyst Bruce Harting of Lehman Brothers advised clients that a possible change in accounting rules would require the two government-sponsored enterprises to shift off-balance-sheet securities to their balance sheets, a move that would require them to raise additional capital to meet regulatory standards. Separately, Reuters reported that the cost of insuring the debt of Fannie Mae and Freddie Mac rose on Monday.

Citing regulatory pressure to maintain its capital levels, IndyMac is shifting away from and shutting down much of its forward mortgage origination business to focus on its reverse mortgage unit, Financial Freedom, according to a letter from chief executive Mike Perry posted on IndyMac's corporate blog. IndyMac said as of July 7 it would no longer accept any new loan submissions or rate locks in its retail and wholesale forward mortgage lending channels, except for its servicing retention channel, and would cut roughly half its staff of 7,200 over the next couple of months. The company said it plans to honor all its existing rate-locked loans and continue to fund them. "While the managers and employees in these units have worked incredibly hard, these units are not currently profitable due to the continuing erosion of the housing and mortgage markets," Mr. Perry said. "At the same time, these operations take up significant balance sheet capacity and 'feed' growth in the servicing asset, an asset we need to shrink given its size relative to our existing capital." IndyMac's blog can be found at http://www.theimbreport.com.

Two classes from two Ameriquest Net Interest Margin Trust issues have been downgraded by Fitch Ratings. Class A of series 2005-RN4 and class A of series 2005-RN5 were downgraded from AAA to BBB. "The rating actions reflect actual paydown performance of the NIM securities to date compared to initial projections, as well as changes that Fitch previously made to its subprime loss forecasting assumptions for the underlying transactions," the rating agency said. Fitch can be found on the Web at http://www.fitchratings.com.

Four classes of GSMPS Mortgage Loan Trust 2005-LT1 have been downgraded by Standard & Poor's Ratings Services. The downgrades were as follows: class M-1, from AA to A; class M-2, from BBB to BB; class B-1, from B to B-minus; and class B-2, from CCC to CC. S&P also affirmed the ratings on five classes from the transaction and another GSMPS deal. The downgrades "reflect the continued adverse performance of the collateral pool, resulting in the reduction of the available credit support available to support the affected classes," the rating agency said.

Nine classes of subprime asset-backed pass-through certificates issued by Ace Securities Corp. Home Equity Loan Trust have been downgraded by Standard & Poor's Ratings Services. The affected securities were in series 2004-HS1, series 2006-HE3, and series 2006-HE4. S&P also affirmed the ratings on three classes from series 2004-HS1. The downgrades were attributed to "adverse collateral performance that has caused monthly losses to exceed monthly excess interest." S&P added that the amount of loans in the delinquency pipeline "strongly suggests that monthly losses will continue to exceed excess interest, thereby further compromising credit support." The collateral consists primarily of subprime first-lien mortgage loans.

Estimates for the next round of earnings results at UBS anticipate that it will see further mortgage-related writedowns, but that they will be mitigated by exposure reductions and hedging that will likely leave the company "at or slightly below break-even." UBS said that "in particular, credit valuation adjustments on monoline insurance exposures" are expected to lead to further writedowns and losses. But overall, UBS said its capitalization is sound. "At the end of the quarter, UBS expects its Tier 1 capital ratio to be approximately 11.5%, and has no need to raise new equity," the company said.

Mortgage servicers increased their loss mitigation efforts by 26% from February to March as 49,000 borrowers agreed to loan modifications or payment plans, according to the first Mortgage Metrics Report from the Office of Thrift Supervision. The new OTS report uses loan-level data to examine the loss mitigation activities of the five largest OTS-regulated thrifts and their affiliates: Washington Mutual, Countrywide Financial, IndyMac, Wachovia FSB, and Merrill Lynch. The data show that 71% of the loss mitigation actions involved loan modifications rather than payment plans. However, subprime borrowers are more likely to get a loan modification than prime borrowers. "Prime mortgages received the fewest loan modifications relative to new foreclosure actions," the OTS report says. The report also indicates that new foreclosures in the first quarter were driven mainly by prime and alternative-A loans, not subprime loans.

Moody's Investors Service has downgraded Long Beach Asset Holdings Corp. CI 2006-WL2NIM notes, series 2006-WL2, class N-2, to A3 from Aa3. "These securities have been downgraded based upon performance of the underlying transactions that has negatively impacted future residual payments to the NIM holders as well as the downgrade of the insurance provider," Moody's said. The deal's performance "relies on excess spread and prepayment penalties generated by the underlying residential mortgage-backed securities and an insurance policy provided by Radian," according to the ratings agency.

The California Reinvestment Coalition says mortgage servicers and lenders are still not working with borrowers who need loan modifications in order to keep their homes. In a third survey of California mortgage counseling agencies servicing homeowners statewide, CRC said it found that despite lenders' promises to help borrowers, foreclosure is still the most common outcome for homeowners struggling to make mortgage payments. "With little accountability, obligation, or oversight, home loan servicers are not doing enough to keep borrowers in their homes," says Kevin Stein, CRC associate director. "For some borrowers, this may mean that they will be doubly victimized by predatory lending practices on the front end, and now by unhelpful loan servicing practices that lead to foreclosure on the back end. We must work immediately and diligently towards solutions to avoid this result." CRC released the report "The Continuing Chasm Between Words and Deeds III," at a press conference held at counseling agency in Stockton, Calif. The report analyzes a survey of 42 mortgage counseling agencies that served 11,062 borrowers in April 2008.

Hope Now servicers helped nearly 170,000 at-risk borrowers stay in their homes in May, but they could not keep up with the record pace of workouts (185,000) completed in April. Nevertheless, Hope Now executive director Faith Schwartz says the pace of workouts is accelerating and the second quarter tally will exceed first quarter workouts. The second quarter results are going to "blow away" the first quarter, said Hope Now advisor Stan Collender. The May data shows that the servicers completed 67,300 loan modifications for prime and subprime borrowers in May, compared to 77,400 in April. Hope Now also reported that 83,000 families lost their homes in foreclosures in May. The Center for Responsible Lending claims that the Hope Now initiative is failing to keep up with the accelerating foreclosure crisis. "Delinquencies and foreclosures keep going up and tens of thousands of loans 'fixed' voluntarily by the industry have already gone bad," CRL executive director Debbie Goldstein said.