Servicing

The Congressional Budget Office estimates that several hundred thousand borrowers could benefit over the next few years from an expanded FHA Secure program and that it would encourage lenders/servicers to restructure more loans. Without federal involvement, restructurings will be "rare" and unlikely to involve any significant writedown of principal that would leave the borrower with positive equity, the CBO says in a paper that explores policy options for stabilizing the housing and financial markets. "Although Federal Reserve chairman Ben Bernanke has urged loan servicers to consider reducing the principal on outstanding loans, voluntary reductions are likely to be rare," the paper says. The Federal Housing Administration is implementing changes to its FHA Secure program to help more delinquent adjustable-rate subprime borrowers refinance into FHA-insured loans. The CBO admits that FHA Secure has its drawbacks and that lenders could receive a "windfall" on loans they should restructure on their own. "Despite that, lenders will be more willing to restructure more mortgages with federal subsidies than without them," CBO says.

Bear Stearns said in a recent SEC filing that it generated a $115 million net profit in the quarter ended Feb. 29 and indicated that developments in the troubled period since then have included a civil investigation of its EMC Mortgage Corp. unit. In a Securities and Exchange Commission filing for the first fiscal quarter, which showed Bear's net income had fallen about 79% on a year-to-year basis, Bear Stearns said it has been cooperating with a March Federal Trade Commission demand for "documents and data relating to EMC's business and servicing practices." The company also said that liquidators of mortgage-related hedge funds named Bear Stearns as a defendant in an April lawsuit. In the fall, Bear had said in a filing that there was a criminal probe of the funds. Bear Stearns can be found online at http://www.bearstearns.com.

The current financial crisis "will affect market structure and pricing for at least a decade," according to a new report from JPMorgan Securities Ltd., London. The report from JPMorgan's global asset allocation and alternative investments unit blames excessive credit risk taking in "housing, leverage, and maturity transformation" for the crisis. It predicts, among other things, that central banks' extension of liquidity to broker-dealers will be permanent and lead to regulation in that area.

Wachovia Corp., Charlotte, N.C., has reported a net loss available to common stockholders of $393 million ($0.20 per share) for the first quarter, citing the decline in the housing market as one of the reasons and announcing a reduced quarterly dividend. Ken Thompson, Wachovia's chief executive officer, said the company has "substantially increased" its reserves and cut the dividend to $0.375 per share. "The precipitous decline in housing market conditions and unprecedented changes in consumer behavior prompted us to update our credit reserve modeling and rely less heavily on historical trends to forecast losses," he said. The company recorded a provision for credit losses of $2.8 billion in the quarter, which it said exceeded net chargeoffs by $2.1 billion. The provision "largely reflected more severe deterioration in the residential housing market, particularly in specific markets in California and Florida, as well as the result of the refinements to the credit reserve model for the payment-option product," Wachovia said. The company's home equity lending was 41% lower than the volume in the first quarter of 2007, "reflecting implementation of tightened credit standards," Wachovia said. The company's exposure to the housing market stems largely from its acquisition of Golden West Financial Corp., a Oakland, Calif.-based thrift, in 2006. Its net loss compared with net earnings of $2.30 billion ($1.20 per share) a year earlier. Wachovia can be found online at http://www.wachovia.com.

New foreclosure filings rose 5% in March and were 57% higher than the level recorded a year earlier, according to RealtyTrac, an online foreclosure marketplace based in Irvine, Calif. The company's U.S. Foreclosure Market Report indicates that 234,685 new foreclosure properties were added to the rolls in March. "The March numbers show that overall foreclosure activity so far this year continues to run nearly 60% above the levels we saw last year," said James J. Saccacio, RealtyTrac's chief executive officer. "On a year-over-year basis, default notices were up nearly 57% and bank repossessions were up nearly 129%, but auction notices were up only 32%, indicating that more defaulting homeowners are simply walking away and deeding their properties back to the foreclosing lender." The company said Nevada, California, and Florida again recorded the highest foreclosure rates in March. RealtyTrac can be found online at http://www.realtytrac.com.

The possible need to provide public support to the housing GSEs in the current financial crisis poses a greater risk to the U.S. government's top triple-A ratings than the potential need to support broker-dealers, according to Standard & Poor's. "While the Bear Stearns sale brought into focus the potential risks associated with supporting the broker-dealer segment of the U.S. financial system, the possible need to provide financial support to government-sponsored enterprises poses a far greater fiscal risk to the 'AAA' rating on the U.S. Government," S&P said. The rating agency said the maximum potential cost of supporting broker-dealers in a "deep and prolonged recession" would be below 3% of gross domestic product, while "an equivalent measure for GSEs" would be "up to 10% of GDP." S&P can be found on the Web at http://www.standardandpoors.com.

Twenty-three certificates in second-lien mortgage-backed security transactions from four issuers have been downgraded by Moody's Investors Service. The downgrades affected the following securities: eight certificates from two Ace Securities Corp. deals; seven certificates from one Allegiance Bancorp Trust deal; six certificates from one C-BASS deal; and two certificates from one Fremont Home Loan Trust deal. Moody's also placed five certificates on review for possible further downgrade. The rating actions were taken because "credit enhancement levels, including excess spread and subordination, were low" in view of projected losses, Moody's said. The actions take into account the "continued and worsening performance" of transactions backed by closed-end second-lien loans.

Ninety-three additional classes of subprime mortgage pass-through certificates were downgraded by Fitch Ratings on April 11 as a result of changes to its subprime loss forecasting assumptions. Fitch also placed 11 classes on Rating Watch Negative and affirmed the ratings on classes with outstanding balances of more than $3.2 billion. The pass-through securities affected by the latest downgrades were: 31 classes from four issues by HSBC Home Equity; 22 classes from three issues by Saxon Asset Securities Trust; 22 classes from three issues by Fremont Home Loan Trust; 13 classes from three issues by Merrill Lynch Mortgage Investors; and five classes from one issue by Specialty Underwriting and Residential Finance Trust. 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 ratings of 468 tranches from 24 transactions issued by Residential Accredit Loans Inc. have been placed on review for possible downgrade by Moody's Investors Service. The ratings were placed on review, in general, based on higher-than-expected rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels, Moody's said. The collateral consists primarily of first-lien, fixed-rate, alternative-A mortgage loans. The rating agency can be found on the Web at http://www.moodys.com.

Hanover Capital Mortgage Holdings Inc., Edison, N.J., has announced the receipt of a notice from the American Stock Exchange that the company does not meet certain continued listing standards. The notice said the real estate investment trust is not in compliance with a stockholders' equity requirement of $2 million, and that its losses from continuing operations and net losses in two of the three most recent fiscal years also put it out of compliance. The exchange also cited a provision permitting delisting of a company's stock if the company "has sustained losses which are so substantial in relation to overall operations or its existing financial resources, or its financial condition has become so impaired, that it appears questionable, in the opinion of the Exchange, as to whether the company will be able to continue operations and/or meet its obligations as they mature." Hanover may submit a plan of compliance by May 8 that would bring it back into compliance by Oct. 8, 2009. If it does not, or if the plan is not accepted, the company will be subject to delisting procedures. Hanover, a mortgage REIT, can be found online at http://www.hanovercapitalholdings.com.