Servicing

An affiliate of WL Ross & Co. has closed on its $1.3 billion purchase of Option One Mortgage Corp., Irvine, Calif., which services $55 billion in A-minus to D loans. With Option One under his belt, WL Ross chief executive Wilbur Ross said he is now in the hunt to buy savings and loan institutions. His financial backers include sovereign wealth funds. In a recent interview with National Mortgage News, Mr. Ross said he eventually wants to enter the loan production business. Last year, Mr. Ross's company bought the servicing platform of bankrupt American Home Mortgage, Melville, N.Y., a subprime and alternative-A servicer. (For the full story, see the May 5 issue of NMN.)

More than 100 additional classes of subprime mortgage-backed securities were downgraded by Fitch Ratings on April 29. Fitch also affirmed the ratings on classes with outstanding balances of more than $2.6 billion. The securities affected by the latest downgrades were: 94 classes from 17 issues by First Franklin; 11 classes from seven issues by Renaissance Home Equity Loan Trust; five classes from three issues by Fremont Home Loan Trust; and one class from an issue by American Business Financial Services. Fitch can be found online at http://www.fitchratings.com.

Liberty Property Trust, Malvern, Pa., has been designated the "Bear of the Day" for April 30 by Zacks Equity Research, Chicago. The Bear of the Day is a stock expected to underperform the markets over the next three to six months. Zacks said the commercial real estate investment trust's operations "are holding up relatively well in the company's core portfolio, although overall vacancies are increasing," and noted its "attractive yield, now over 7%, although the dividend is barely being covered with operating cash." Office and industrial markets are weakening throughout the United States, Zacks said. "Liberty has a large development pipeline that is only mildly pre-leased, and poses risk should the economy continue to soften in 2008," the research firm said. Zacks can be found online at http://www.zacks.com, and Liberty Property Trust can be found at http://www.libertyproperty.com.

Silver State Bancorp, Henderson, Nev., has reported a net loss of $14.4 million ($0.95 per share) for the first quarter, citing an increase in its loan loss reserve related to faltering real estate markets. In the first quarter of 2007, the company reported net income of $5.6 million ($0.39 per share). The loss reflects a $31.0 million provision for loan losses that was attributed to first-quarter chargeoffs of $9.7 million and nonperforming loans that grew from $13.1 million to $78.0 million. "The impact of the deterioration of the Nevada and Arizona economies and real estate markets on certain segments of our loan portfolio, namely our residential construction and land loans, began to be realized toward the end of the first quarter of 2008 as project delays mounted and updated appraisals showing significant[ly] lower valuations were received," said Corey L. Johnson, Silver State's president and chief executive officer. The company can be found online at http://www.silverstatebancorp.com.

FirstFed Financial Corp., Los Angeles, has reported a mortgage-related net loss of $69.8 million ($5.11 per share), compared with net income of $32.4 million ($1.92 per share) a year earlier. The company said the loss resulted chiefly from a $150.3 million provision for loan losses due to increased delinquencies and chargeoffs on single-family loans and declines in the value of single-family homes throughout California. A year earlier, the loan loss provision totaled only $3.8 million, FirstFed said. "Adjustable-rate mortgages that have reached their maximum allowable negative amortization and now require an increased payment were a contributing factor in the higher level of delinquent loans during the first quarter of 2008," the company said. "The bank estimates that 1,310 loans with balances totaling approximately $609.9 million could hit their maximum allowable negative amortization during the rest of 2008, and that another 1,536 loans, with balances totaling $684.9 million, could hit their maximum allowable negative amortization during 2009."

Fitch Ratings has announced a review to evaluate potential complementary scales for structured finance deals that might improve transparency, provide added information, and address critiques of such ratings. Fitch said it now uses only one rating scale, but noted growing debate about the suitability of this approach for structured deals. In response, the rating agency has suggested three complementary scales for such deals. Loss Given Default ratings would try to quantify recoveries (on a tranche-level basis) that a structured finance creditor would likely receive in a default. Fitch said an LGD scale would address the common criticism that a structured finance tranche and a corporate bond with the same rating may have similar default characteristics, but that actual losses in a default "may differ materially." Transition/Stability ratings would try to capture the likelihood of a rating change in a given period, and Collateral ratings would try to measure the aggregate quality of a deal's underlying collateral. Fitch said it will begin to issue drafts on the proposals by early June, but welcomes "preliminary feedback."

Citigroup has priced an offering of $4.5 billion of common stock at $25.27 per share. The common stock offering comes on the heels of Citi's $6 billion offering of preferred shares. Citi said the two capital-raising moves would bring its Tier One capital ratio to 8.6% on a pro forma basis using March 31 data. Wall Street's reaction was muted, with Citi's shares falling about 3% in morning trading April 30 after the pricing was announced.

The Federal Trade Commission's multiyear investigation into the servicing practices of a Bear Stearns affiliate could lead to the filing of a complaint, but EMC Mortgage Corp. executives have agreed to resolve the matter through "consent negotiations," according to the FTC. Lydia Parnes, the FTC's director of consumer protection, told a Senate panel that FTC staff "believes EMC and its parent Bear Stearns have violated a number of federal consumer protection statutes in connection with its servicing activities." The FTC director indicated that negotiations have not started yet. "The FTC cannot comment further on this ongoing law enforcement investigation," she testified. Ms. Parnes also revealed that the FTC has launched "several nonpublic investigations of mortgage originators for possible violations of fair lending laws." In addition, the consumer protection agency is investigating more than a dozen mortgage companies for deceptive advertising. The FTC can be found online at http://www.ftc.gov.

The Federal Deposit Insurance Corp. has developed a $50 billion "pay-down" loan program to facilitate the restructuring of "underwater" mortgages and prevent 1 million foreclosures. If approved by Congress, the Treasury Department would make loans to borrowers to pay down the principal of the first mortgage by up to 20%. Mortgage investors participating in the program would pay Treasury's financing costs and interest on the Home Ownership Preservation loan for the first five years. After five years, the borrower would start paying principal and interest. To ensure repayment of the HOP loans, the first lienholders would subordinate their interests to the Treasury. This would ensure that the government is "paid off the top," FDIC Chairman Sheila Bair said, when there is a sale or refinance. She called it a "workable" plan that would make "unaffordable loans affordable." It would also avoid dealing with second lienholders. The loans could stay in the securitized pools and the servicer wouldn't have to get the second lienholder's approval for the restructuring, Ms. Bair told reporters.

Moody's Investors Service has downgraded 63 certificates from 11 transactions issued by Nomura Asset Acceptance Corp. Alternative Loan Trust and backed by second-lien loans. Moody's also placed on review for possible downgrade three of the downgraded certificates as well as two others. Moody's said the negative rating actions were based on credit enhancement levels, including excess spread and subordination, that were deemed too low in view of projected losses. They take into account "the continued and worsening performance" of transactions backed by closed-end second-lien collateral, Moody's said. The rating agency can be found online at http://www.moodys.com.