Servicing

Many subprime borrowers who receive loan modifications are still likely to fall back into default, according to servicing executives who spoke Thursday at SourceMedia's second annual mortgage servicing conference in Dallas. Weak housing markets, a possible recession, and changing borrower behavior mean that helping borrowers avoid foreclosure by modifying their loans will not always keep those borrowers out of trouble for long, the speakers said. Larry Litton, president and CEO of Litton Loan Servicing, said 35% of the high-foreclosure-risk loans that are modified at his firm end up back in default after the modification. Robert Meachum, executive vice president at Saxon Mortgage, said he believes that is actually on the low side. He expects 40% to 45% to re-default. While a 35% or higher default rate may sound high, Mr. Litton said it may be inevitable in today's environment. Moreover, he said such modifications are probably still in the interests of servicers, investors, and borrowers. Tightening up on modification requirements would lead to a higher frequency of foreclosure, and given the rising loss severity rates, it is best to try to keep foreclosure frequency down, he said.

Merrill Lynch -- once the largest Wall Street player in the subprime market -- took $4.5 billion in mortgage-related writedowns in the first quarter and revealed that it has additional asset-backed security exposure of $6.7 billion. The figures were released along with Merrill's announcement that it lost $1.97 billion in the first quarter, compared with a $2 billion profit a year earlier. The $4.5 billion in subprime charges includes a $1.5 billion writedown on ABS-related collateralized debt obligations and $3 billion in charges that Merrill says are "related to hedges with financial guarantors." At the end of the fourth quarter, Merrill said it had subprime ABS exposure of $5.1 billion. In early March the investment banking firm closed its subprime origination unit, First Franklin Financial Corp. of San Jose, Calif., and placed its servicing operation on the auction block. A little more than a year ago Merrill paid $1.3 billion for the units. The seller was National City Corp. of Cleveland.

One hundred and eight additional classes of subprime mortgage pass-through certificates were downgraded by Fitch Ratings on April 15 as a result of changes to its subprime loss forecasting assumptions. Fitch also placed nine classes on Rating Watch Negative and affirmed the ratings on classes with outstanding balances of more than $4.6 billion. The pass-through securities affected by the latest downgrades were: 96 classes from 13 issues by Structured Asset Investment Loan; and 12 classes from two issues by Popular. The rating actions were attributed to changes to Fitch's subprime loss forecasting assumptions that "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness." Fitch can be found online at http://www.fitchratings.com.

The Federal Deposit Insurance Corp. has adopted and is seeking comment on an interim policy statement that aims to "reduce market uncertainty and the additional costs of U.S. covered bond transactions" while regulators evaluate the benefits and risks of the products. The interim final guidance, which is effective immediately but may be amended later in response to comments, addresses "the availability of expedited access to collateral pledged to certain covered bonds in a receivership or a conservatorship, after the FDIC decides whether to terminate or continue the transaction." Among the conditions the European-style mortgage bonds must meet for the guidance to apply is a provision that they constitute "no more than 4% of an institution¹s total liabilities after issuance." Covered bonds are relatively new to the U.S. mortgage market and have had only two issuers, Washington Mutual and Bank of America.

JPMorgan Chase & Co., New York, has reported net income of $2.4 billion ($0.68) per share for the first quarter 2008, down 50% from $4.8 billion ($1.34 per share) a year earlier, a nosedive linked to mortgage-related writedowns. Its investment bank lost $87 million for the quarter because of writedowns totaling $2.6 billion, including $1.2 billion of writedowns attributable to prime, alternative-A, and subprime mortgages. From the mortgage banking business itself, the company said it had net income of $132 million, up from $84 million one year earlier. Mortgage loan originations totaled $47.1 billion, up 30% from the volume a year earlier. Changes in the value of its mortgage servicing rights asset totaled negative-$425 million, compared with negative-$378 million in the first quarter of 2007. But it reported servicing revenue of $175 million, down from $204 million last year. JPMorgan Chase had $149 million in net chargeoffs of subprime loans, compared with $20 million in the previous year. The provision for credit losses totaled $2.5 billion for the quarter, including an increase of $1.1 billion in the allowance related to home equity loans and $417 million for subprime loans. Home equity net chargeoffs for the quarter totaled $447 million, compared with $68 million a year earlier.

Hammered by rising residential loan delinquencies, Washington Mutual, the nation's sixth-largest originator, lost $1.14 billion in the first quarter, compared with a profit of $784 million in the same period a year ago. Over the past six months it has lost $2.3 billion. The Seattle-based WaMu, also the nation's largest thrift, is exiting the wholesale/broker channel and stopped funding subprime several months ago. A group of investors anchored by TPG Capital of Texas recently agreed to pump $7 billion of capital into WaMu by purchasing shares in the struggling company. In the first quarter it set aside $907 million to cover what it calls "increasing" subprime delinquencies. In the fourth quarter the provision was $511 million. WaMu originated just $13.77 billion of home loans in the first quarter, a stunning 66% decline from the volume in the first quarter of 2007.

Wells Fargo & Co. -- which is poised to unseat Countrywide Home Loans as the nation's largest residential lender -- posted a $2 billion profit in the first quarter on record revenue of $10.6 billion. It originated $61 billion in single-family loans during the quarter, a 7% gain from the volume of a year earlier. Its servicing portfolio increased to $1.53 trillion, up 10% from March of last year. The banking giant's strong performance came despite a 16% sequential increase in its portfolio of nonperforming loans. At the end of March, the San Francisco-based Wells had $4.5 billion in NPLs, including $658 million worth of foreclosed and repossessed real estate and auto loans. It had $314 million of first-lien residential mortgages that were 90 days or more past due and another $228 million in late second-lien mortgages. A year ago it held $223 million in late firsts and seconds. Wells is also the largest player in the FHA/VA market. At March 31, it was saddled with $578 million of insured Ginnie Mae repurchases.

The Office of Thrift Supervision has come up with an "elegant" way to avoid moral hazard and provide an incentive for investors to write down a loan and for second-lien holders to participate in Federal Housing Administration refinancings of troubled subprime mortgages, according to Sen. Bob Corker, R-Tenn. OTS Deputy Director Scott Polakoff told a Senate panel that "negative equity certificates" could be used to balance the interests of homeowners, investors, and second-lien holders. "It seems worthy to explore the possibility that some second-mortgage holders could also share to some degree in the negative equity certificate as an incentive to subordinate their position in a refinance opportunity," Mr. Polakoff said. Sen. Corker said the certificates would avoid the moral hazard involved when a borrower "takes advantage of the program, does a quick sale, and benefits from the writedown." Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., welcomed the OTS suggestion and indicated that he might use it in refining his FHA refinancing bill. "To get the investor to step up and take that haircut, I think you've got to have a proper incentive in there," Sen. Dodd said.

Fifteen classes of subprime mortgage pass-through certificates issued by Carrington Mortgage Loan Trust have been downgraded by Fitch Ratings as a result of changes to the rating agency's subprime loss forecasting assumptions. Fitch also affirmed the ratings on classes with outstanding balances of $1.8 billion. The rating actions were attributed to changes to Fitch's subprime loss forecasting assumptions that "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness." Fitch can be found online at http://www.fitchratings.com.

NYSE Regulation Inc., the regulatory arm of the New York Stock Exchange, has announced that it will suspend trading in the common stock of Fremont General Corp., Brea, Calif., before the start of trading on April 17. At the same time, trading is also being suspended in Fremont General Financing I's trust preferred securities. Fremont's common stock had fallen below the NYSE's continued-listing standard with an average closing price of less than $1 over a period of 30 consecutive trading days. NYSE Regulation also considered the "abnormally low" price of Fremont's common stock, which closed at $0.45 on April 11, with a resultant common market capitalization of $35.8 million. Fremont said the common stock and trust preferred securities would trade on the pink sheets starting April 17. The delisting news came one day after Fremont entered into a deal to sell the assets of Fremont Investment & Loan to CapitalSource Inc., Chevy Chase, Md. In late morning trading on April 15, Fremont's stock stood at $0.32 per share, down $0.22 on the day. Fremont can be found online at http://www.fremontgeneral.com.