Servicing

Capital markets disruptions linked to U.S. mortgage woes and rating agency actions have affected the liquidity of CIT Group Inc., according to the New York-based commercial finance company. CIT said that, as a result of its liquidity concerns, it is "drawing upon its $7.3 billion in unsecured U.S. bank credit facilities" and using the proceeds "to repay debt maturing in 2008, including commercial paper, and provide financing to its core commercial franchises." The company also said it would "continue to actively seek additional funding sources, as well as explore and execute on the sale of nonstrategic assets and/or business lines."

The 12 Federal Home Loan Banks have been given a green light by their regulator to purchase over $100 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac over the next two years to provide additional liquidity for the MBS market. The Federal Housing Finance Board agreed by notational vote to raise the cap on MBS investments from 300% to 600% of capital as part of the government's effort to help stabilize the housing market. The FHLBanks held $136.4 billion in MBS as of Sept. 30. Fannie and Freddie will be testing the market soon with the issuance of jumbo MBS for the first time. In addition, the Finance Board said the FHLBanks can purchase agency MBS that are secured by subprime and nontraditional mortgages that meet federal regulatory guidance. "Increasing the agency MBS investment authority for the banks is another way in which the FHLBank System can perform its traditional mission," said Finance Board Chairman Ronald Rosenfeld. Fannie's and Freddie's regulator recently relaxed their capital requirements so the two government-sponsored enterprises could expand their investment portfolios and purchase $200 billion in mortgage loans and MBS.

JPMorgan Chase and The Bear Stearns Cos. Inc. have amended their merger agreement, making changes that include raising the implied value of Bear Stearns common stock from $2 per share to approximately $10 per share. The two companies also entered into a share purchase agreement under which JPMorgan Chase would purchase 95 million newly issued shares of Bear Stearns common stock -- or 39.5% of the outstanding Bear Stearns common stock after the issuance -- at the amended agreement price. In addition, the Federal Reserve Bank of New York's $30 billion in special financing associated with the deal has been changed so that JPMorgan Chase will bear the first $1 billion of any losses associated with the Bear assets being financed and the Fed will fund the remaining $29 billion on a nonrecourse basis to JPMorgan Chase.

Credit Plus Inc., Salisbury, Md., is creating a new company, Mortgage Works, which will specialize in loss mitigation products with the goal of allowing lenders to identify potential problem loans in their portfolio before they become an issue. In an interview at the Regional Conference of Mortgage Bankers Associations in Atlantic City, David Wheeler, regional account executive with Credit Plus, said the new company was created after discussions with its lender clients who were looking for a way to identify potential problem borrowers. The program, currently in beta testing, is expected to be released in the second quarter. To identify potential problems he said, the program looks at several factors, not just credit. It will identify refinance opportunities and adjustable-rate mortgage replacement strategies. Recognizing that larger and smaller lenders have different needs in this area, the products offered by Mortgage Works will be customizable. "It is robust enough to accept whatever the lenders needs are," Mr. Wheeler said.

DBRS has downgraded 676 classes from 113 residential mortgage-backed securities transactions, reflecting higher serious delinquencies relative to the available credit enhancement. Among deals backed primarily by first-lien collateral, the Toronto-based rating agency said that given the potential for significant future losses, excess spread in the downgraded classes is not expected to cover anticipated losses. As a result, the principal balance of subordinate classes may suffer writedowns. Among second-lien transactions, DBRS said that the downgrades reflect the rapid deterioration in credit enhancement resulting from a significant increase in delinquencies and losses. That has depleted over-collateralization in many transactions.

Bank of America has a rigid transition process it uses for any of the acquisitions it has done or is doing, said its president for consumer real estate Floyd Robinson. He was asked during a panel session at the Regional Conference of Mortgage Bankers Associations in Atlantic City to provide an update on BoA's acquisition of Countrywide Financial Corp., Calabasas, Calif. The Charlotte, N.C.-based bank is assigning "hundreds" of associates to the transition process. There has been a 30-day look at the practices of both companies, Mr. Robinson said, and one of the items that resonated with him is the disparity in the two companies' respective direct-to-consumer businesses. BoA has done $168 billion in this channel while Countrywide has $113 billion. Much of Countrywide's production comes from the correspondent and wholesale channels, areas that BoA does not do business in, leading Mr. Robinson to point out Countrywide has a very different business model than BoA does. The different approaches and attitudes between the two, he added, could make this one of the most challenging acquisition integrations for BoA. One business the combination will not do is subprime, an area BoA has not been in for several years. The company will not take an inappropriate risk to its reputation, Mr. Robinson said.

Moody's Investors Service has downgraded National City Bank's servicer quality rating for second liens by one notch, citing lower ratings on the parent company's long-term debt as the primary factor in the rating action. Moody's lowered National City's servicer quality rating to "SQ2" from a previous rating of "SQ2-plus," but also removed the servicer rating from review for possible additional downgrades. Moody's recently downgraded the parent company, National City Corp., to "A3" from "A2" for senior debt. The parent company's debt ratings remain on review.

Newport Beach, Calif.-based DRI Management Systems has planned to launch RINCON, a Web-enabled default management application. At the MBA Tech Show DRI talked about how RINCON helps servicers better manage defaults by using Web services to offer easy deployment, a more robust workflow, letters, forms and spreadsheets embedded in the workflow, automated connection between third parties, an exception-based setup to allow for a more automated process and an upgraded loss mitigation decisioning model. This Web-enabled version of the company's The Default Solution product will be available in early 2009.

Morgan Stanley during the first fiscal quarter produced its second highest fixed income sales and trading revenues ever but also took mortgage proprietary trading net writedowns of about $1.2 billion. The company saw net earnings fall by almost 42% to approximately $1.55 billion from about $2.67 billion during a comparable quarter the year before. The company also noted in its earnings report for the quarter that it had $6.1 billion in non-interest expenses that included severance payments during the period. In addition, Morgan Stanley noted that it saw a lower percentage drop in net income year-to-year when its earnings were compared on an "income from continuing operations" basis.

Reflecting on how the mainstream press has treated the mortgage business in the past year, Mortgage Bankers Association chairman Kieran Quinn told attendees at the Regional Conference of Mortgage Bankers Associations in Atlantic City, "I'm convinced there is an endless supply of bad headlines and they are going to run through 2008." He called for a release of the portfolio caps on Fannie Mae and Freddie Mac as well as an expansion of the higher loan limits to all 50 states and not just selected areas. "We're not done" pushing for that to happen, Mr. Quinn said. As for dealing with troubled loans, "I'm almost ready for the second coming of the RTC," he said, but in this case the R would stand for residential. Furthermore, participation would be voluntary. He reiterated MBA's contention that if a bankruptcy "cramdown" bill is enacted, it would drive up the cost of mortgages by 150 basis points, adding there are some lenders who have told him it would be more than that. Noting the close vote that defeated the bill in the U.S. Senate, he warned the issue will be coming back, attached to a bill the industry really wants.