Servicing

REO Sentinel, Jacksonville, Fla., has announced the introduction of a technology that offers "an inexpensive but high-value solution" to the problem of monitoring and maintaining presale and real-estate-owned properties. Rich Rollins, chief executive officer of the company, said the device, also called REO Sentinel, was developed in conjunction with loan servicers and a property inspection and preservation company. "For the first time, lenders and their property preservation managers can have real-time views into what is occurring in every defaulted property they are trying to market thanks to a small, patented device installed in each house," Mr. Rollins said. ".... [REO Sentinel] can detect many types of gases, the presence of smoke and high humidity conditions, and even takes a photo of anyone entering the property." The company can be found online at http://www.reosentinel.com.

Thornburg Mortgage, a jumbo lending real estate investment trust, revealed Thursday that it has been hit with $300 million in margin calls from its lenders since Feb. 14. The margin calls were sparked by a reduction in value on $2.9 billion in holdings of alternative-A adjustable-rate mortgages. A spokeswoman for the REIT told MortgageWire that "We have met all margin calls to date, and expect to continue to do so." In trading, Thornburg's stock was down almost 18% to $9.47 a share. The lender/servicer has an on-balance-sheet portfolio of about $35.4 billion, 97% of which is triple-A or double-A rated. Thornburg, a nondepository, is one of the largest jumbo lenders in the United States, according to the Quarterly Data Report. At year's end, its portfolio was yielding 5.75% with a cost of funds of 5.04%. The 60-day-plus delinquency rate on its ARM holdings stood at 0.44% as of Dec. 31, up from 0.27% in the previous quarter.

Fannie Mae has announced the introduction of a mortgage workout option under which servicers can offer an unsecured personal loan to enable qualified borrowers to cure the payment default on a mortgage loan owned or securitized by Fannie Mae. The option, called HomeSaver Advance, "will help Fannie Mae streamline its loss mitigation efforts and offer loan servicers a new way to cope with a delinquent loan," said Mike Quinn, Fannie's senior vice president for single-family credit risk management. Fannie Mae said it expects the new option to reduce the number of delinquent mortgage loans it buys from its mortgage-backed securities trusts and decrease the fair-value losses it would record in connection with those purchases. Fannie Mae can be found on the Web at http://www.fanniemae.com.

Fannie Mae's B-plus Bank Financial Strength Rating has been placed on review for possible downgrade by Moody's Investors Service. Moody's affirmed several other ratings on the government-sponsored enterprise: senior debt, Aaa; short-term debt, Prime-1; subordinated debt, Aa2; and preferred stock, Aa3. The rating actions followed Fannie Mae's announcement of a $3.6 billion loss for the fourth quarter and a $2.1 billion loss for all of 2007. "This loss exceeded our expectations and represents a significant deterioration of surplus regulatory capital," which stood at $3.9 billion as of Dec. 31 based on the required 30% surplus to the statutory minimum, the rating agency said. "Additionally, Moody's expects the company to record sizable losses in the first half of 2008 and possibly a net loss for the year due to the continued deterioration in the residential mortgage sector." Moody's said its concerns about Fannie's capital position were "partially mitigated" by an announcement by the Office of Federal Housing Enterprise Oversight that it will discuss with the housing GSEs a gradual decrease in the required 30% capital surplus. Moody's can be found online at http://www.moodys.com.

The mortgage industry is facing the prospect of 1.8 million foreclosures this year, up from 1.5 million in 2007, according to a prediction by the Mortgage Bankers Association's chief economist. Doug Duncan, who will soon join Fannie Mae as its chief economist, made the prediction during a panel discussion at the MBA National Mortgage Servicing Conference in New Orleans. The panel agreed that foreclosures are not just a subprime problem, but a broader economic problem affecting different regions, especially the Midwest and previously overheated markets. Amy Crews Cutts, deputy chief economist at Freddie Mac, said delinquencies and foreclosures are also rising in prime loans. Ms. Cutts said it will take time, perhaps until the third quarter, before home prices stop falling. "The recession risk is higher," she said. "And unemployment will creep up on us." Alternative-A and negative-amortization loans were also cited as possible causes for concern when they reset in 2010.

Senate Democrats have narrowed the scope of the bankruptcy provisions in a foreclosure prevention bill so that only nontraditional and subprime mortgages could be restructured by bankruptcy judges. The Democrats were pushing for a cloture vote on the bill Thursday (Feb. 28), and the financial services industry was lobbying to defeat it because of the bankruptcy provisions. The White House has threatened to veto the bill. If the Democrats can get 60 votes, it opens the door to debate and amendments before final passage. The original bill (S. 2636) would have given the bankruptcy courts the authority to reduce the principal amount or interest rate on any single-family mortgage. In trying to get Republican support, the authors limited the scope to nontraditional and subprime mortgages originated before the date of enactment. The Democrats also allow lenders to recoup any increase in the property's value if the bankruptcy filer sells the house within five years.

Freddie Mac has reported a net loss of $3.1 billion for 2007 ($5.37 per share), compared with net income of $2.3 billion ($3.00 per share) in 2006. In the fourth quarter, Freddie Mac lost $2.5 billion ($3.97 per share), compared with a net loss of $401 million ($0.73 per share) a year earlier. During the quarter, Freddie Mac took mark-to-market losses of $2.3 billion on its derivatives portfolio and $800 million on the value of its credit guarantee asset. Credit losses totaled $499 million for the full year, including $236 million reported in the fourth quarter and $126 million in the third quarter. As a result of the problems in the U.S. housing market, Freddie has increased its total credit loss estimates to $2.2 billion for this year and $2.9 billion for 2009. Freddie Mac said it had estimated regulatory core capital of $37.9 billion as of Dec. 31, 2007, which was $11.4 billion in excess of its regulatory minimum capital requirement and $3.5 million in excess of the 30% mandatory target capital surplus mandated by the Office of Federal Housing Enterprise Oversight.

Moody's Investors Service issued a flurry of news releases Feb. 26 involving downgrades and placements on review for possible downgrade of more than 100 classes of securities in transactions from eight issuers that are backed by second-lien loans. Among the affected securities were the following: Merrill Lynch Mortgage Investors Trust, 22 downgrades and one review placement; CSFB Home Equity Mortgage Trust, 19 downgrades and three review placements; SACO I Trust, 13 downgrades and two review placements; and Nomura Alternative Loan Trust, 10 downgrades and three review placements. "Substantial pool losses over the last few months have continued to erode credit enhancement available to the mezzanine and senior certificates," the rating agency said. "Despite the large amount of write-offs due to losses, delinquency pipelines have remained high as borrowers continue to default."

The SQ2-plus servicer quality rating of National City Bank as a primary servicer of second-lien loans has been placed on review for possible downgrade by Moody's Investors Service. The rating agency said the action was prompted by the "high level of volatility" in the mortgage market and a recent Moody's action placing the long-term ratings of the bank's parent company, National City Corp., under review for possible downgrade. Moody's said National City has largely maintained its servicing performance, but that the deterioration in the mortgage market and the slowdown in origination volume have the potential to "moderately" affect the investment and resource levels in the company's servicing platform. Servicing is performed by National City Lending Services, a division of National City Bank. The rating agency can be found on the Web at http://www.moodys.com.

An estimated 40% of outstanding subprime mortgage loans could go into default over the next three years based on current economic assumptions, according to Michael Bykhovsky, president of Applied Analytics, San Francisco. With an estimated loss severity in the range of 50%, that could lead to $200 billion in additional losses related to defaults on subprime home loans. During a press briefing sponsored by Fidelity National Information Services (the parent of Applied Analytics) at the Mortgage Bankers Association's National Mortgage Servicing Conference, Mr. Bykhovsky said there are an estimated $1 trillion of subprime home loans outstanding. He said he is skeptical of the prospects for term modifications that are being proposed as part of an effort to support subprime borrowers. "It will help, but not hugely," Mr. Bykhovsky said. "A lot of subprime loans will default anyway." Based on assumptions that include two more years of housing price declines, Applied Analytics projects that default rates may not start to trend downward until 2011. That dire outlook reflects the impact of declining home values on outstanding subprime mortgage loans, Mr. Bykhovsky said.