Servicing

National banks need to deal fairly with all struggling homeowners when it comes to deciding who will qualify for loan workouts and who will slip into foreclosure, according to the comptroller of the currency. "It's important that borrowers aren't being foreclosed on more quickly or denied access to modification programs, because of their race," Comptroller John Dugan said. In the past, fair-lending exams used to be focused mainly on discriminatory lending practices. But now with so many mortgages going into default, banks need to make sure that "similarly situated borrowers who default or become delinquent are treated similarly," Mr. Dugan told an OCC compliance conference. The comptroller also noted that some banks made subprime mortgages that qualified for Community Reinvestment Act. And he called on those banks to continue to make "good loans that will fulfill their CRA obligation."

The Federal Housing Administration is moving ahead with the implementation of risk-based pricing for mortgage insurance premiums on July 14, and HUD officials are urging Congress not to block the move. The RBP conversion was announced by the agency back in April. Steven Preston, the recently confirmed secretary of the Department of Housing and Urban Development, said the FHA is moving ahead with the expansion of the FHA Secure program on July 14. The new lending criteria will allow borrowers who have missed two or three payments in the previous 12 months to refinance into FHA-insured loans. The expanded FHA Secure also requires that premiums be priced according to the borrower's individual credit profile. The FHA currently charges a standard premium for all borrowers. HUD officials are concerned that Congress may impose a moratorium on risk-based pricing as part of an FHA modernization bill pending in the Senate. "That would be a very big mistake," Secretary Preston told reporters. "FHA would have to increase premiums across the board for all its borrowers or seek taxpayer funds in October to cover potential losses."

Proposed changes in accounting rules that could force Fannie Mae and Freddie Mac to move certain mortgage-backed securities onto their balance sheets should not have a major impact on their capital requirements, according to the GSE regulator. The Office of Federal Housing Enterprise Oversight is working with the Financial Accounting Standards Board on changes to FAS 140, OFHEO Director James Lockhart told MortgageWire. The two government-sponsored enterprises already have a 45-basis-point capital charge on their guaranteed MBS, he noted. And investor concerns that an accounting change would trigger a dramatic rise in their capital requirements "makes no sense," Mr. Lockhart said. Wall Street stock investors dumped Fannie and Freddie shares on Monday on fears that the GSE might have to raise $75 billion in new capital due to accounting changes [see above item]. In an interview on CNBC-TV, Mr. Lockhart stressed that Fannie and Freddie are adequately capitalized and have raised $20 billion in new capital over the past seven months.

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.