Servicing

Mortgage lender Sovereign Bancorp, Philadelphia, says it expects to take $70 million worth of charges on home equity loans and warehouse lines of credit when it reports third-quarter earnings next week.In a statement, the company said it will take a $50 million charge tied to its remaining correspondent home equity portfolio. The thrift exited the correspondent home equity business in early 2006. In the first quarter of this year it sold $3.3 billion in correspondent home equity loans, but kept certain mortgages that it could not sell. Sovereign said it would take a $20 million charge on warehouse lines of credit made to now-defunct subprime lenders. Sovereign ranked 51st among all mortgage lenders in the second quarter, funding $950 million in loans, according to the Quarterly Data Report, a MortgageWire affiliate. It is scheduled to release third-quarter earnings on Oct. 17. Sovereign can be found online at http://www.sovereignbank.com.

The default rate on subprime mortgage loans hit a record high of 14.65% in July, up from the record 13.44% in the previous month, as foreclosures also set a record, according to a Friedman Billings Ramsey report.The subprime foreclosure rate rose 40 basis points in July to 5.77%. During the last major upheaval in the subprime market, the default rate hit a high of 13.42% in August 1997 and foreclosures hit a high of 5.19% that same month. The default rate on alternative-A loans also moved up in July to 3.34% from 3.0% in June. "The default rates on alt-A and subprime loans deteriorated sharply in July from June, as they did in June from May, ending six months of gradual erosion," FBR managing director Michael Youngblood said. FBR can be found online at http://www.fbr.com.

Jumbo lender Thornburg Mortgage, Santa Fe, N.M., says its loss on asset sales will total $1.1 billion in the third quarter, or $236 million more than it originally anticipated.The publicly traded real estate investment trust -- which is slated to report earnings on Oct. 16 -- said it has sold $22 billion worth of what it calls "high-quality" adjustable-rate mortgages since Aug. 10. Even though its delinquency ratio is among the lowest in the mortgage industry, it has been selling assets as a way to bolster its liquidity. At the end of September its seriously delinquent ratio was just 0.27%. Commenting on the revised loss estimate, company president Larry Goldstone noted that, "The global dislocation of the mortgage finance and credit markets this past summer has had a greater impact on our balance sheet than we initially estimated. However, we have begun to see a modest improvement in financing conditions since August. Despite the greater-than-previously-reported losses, we believe we have adequate liquidity to support our current borrowings portfolio and excess capital to continue to fund new loans." Thornburg can be found online at http://www.thornburg.com.

Three classes of notes from Triaxx Funding High Grade I Ltd., which invests in residential mortgage-backed securities, have been downgraded by Fitch Ratings.The downgrades were as follows: class B-2 mezzanine floating-rate notes, from AAA to AA; class C, mezzanine floating-rate deferrable-interest notes, from A to BB; and class D, mezzanine floating-rate deferrable-interest notes, from BBB to B. Class B-2 was placed on Rating Watch Negative, and the other two classes remain there. Classes C and D were downgraded due to a reduction in credit enhancement caused by losses and a drop in the market value of the underlying assets, Fitch said, while the class B-2 notes have low risk, but a continued decline in prices "has increased the vulnerability of these notes if the transaction is forced to liquidate." Triaxx invests in triple-A rated RMBS assets using proceeds raised by issuing notes and equity and using repo funding, Fitch said.

Over 140 classes of net interest margin notes from more than 20 issuers have been downgraded by Fitch Ratings as a result of the performance of the NIM securities and, in the vast majority of cases, of changes to its subprime loss forecasting assumptions.Fitch also affirmed the ratings on more than 70 NIM classes. Among the NIM securities affected by the latest downgrades are: 26 classes from 13 Structured Asset Investment Loan Trust deals; 17 classes from 17 Structured Asset Backed Receivables deals; 10 classes from four Park Place deals; eight classes from three J.P. Morgan deals; and seven classes from six Structured Asset Securities Corp. deals. The rating actions were attributed to actual pay-down performance of the NIM securities to date compared with initial projections, as well as 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 House has passed a tax relief bill by a 386-27 vote that removes a tax penalty on homeowners when the principal amount of their mortgage is reduced due to loan modifications, short sales, or deeds in lieu.Up to $2 million in debt reduction could be taken by a homeowner facing foreclosures without a tax penalty under the Mortgage Forgiveness Debt Relief bill (H.R. 3648). The bill would also extend for seven years a tax deduction on mortgage insurance premiums. "The Administration supports House passage of H.R. 3648, which advances the President's proposal to help financially troubled homeowners by shielding mortgage write-offs from taxation," the White House Office of Management and Budget said in a Statement of Administration Policy. However, the Bush administration "strongly believes" the relief should be temporary. The SAP also says the administration does not believe it is "necessary" to change the capital gains rules for second homes to offset the costs of the debt forgiveness provisions. An effort to strip the capital gains provision from the bill failed on a 201-212 vote. The Senate has not taken any action on a mortgage debt forgiveness bill.

State attorneys general and bank commissioners have initiated an effort to monitor the top 20 subprime mortgage servicers to ensure that borrowers get the loan modifications they need."We feel this is a serious effort to avert a foreclosure avalanche that we potentially face," Iowa AG Tom Miller told MortgageWire. A working group of 11 AGs and three bank commissioners recently met with the top 10 subprime servicers in Chicago to discuss loan modifications. The working group expects the servicers to provide regular reports on their loss mitigation efforts. The state officials also expect to have contact with the servicers on a weekly or even daily basis.

Washington Mutual, Seattle, says its third-quarter net income will likely fall by 75% because of subprime and home equity-related writedowns of almost $1 billion.WaMu, the nation's largest thrift, anticipates not only chargeoffs in its loans "held-for-sale" account, but also securities trading losses of $150 million and an impairment charge of $110 million on investment-grade mortgage-backed securities. In a new research note, Credit Suisse called WaMu's exposure to higher credit risk "outsized." CS says WaMu "is far from being out of the woods," adding that, "We expect the trend of higher NPAs [nonperforming assets]" to persist through 2008. According to the Quarterly Data Report, WaMu is the nation's 13th-largest subprime servicer. with $45 billion in receivables.

Merrill Lynch has estimated that it will take $4.5 billion in credit crunch-related writedowns (net of hedges) to subprime mortgages, collateralized debt obligations, and leveraged finance commitments in the fiscal third quarter.The company pegged its expected net loss for the quarter at up to 50 cents per share. "While market conditions were extremely difficult and the degree of sustained dislocation unprecedented, we are disappointed in our performance in structured finance and mortgages," said Merrill Lynch chairman and chief executive officer Stan O'Neal. "We can do a better job in managing this risk." The company also has confirmed multiple reports that at least two of its fixed-income executives, Osman Samerci and Dale Lattanzio, have left and that it has promoted David Sobotka -- head of commodities in the fixed-income, currencies, and commodities unit -- to global head of that unit.

The mortgage industry suffered an astounding job loss of 27,200 positions in August as the subprime industry collapsed amid concerns about foreclosures and a near-dormant secondary market for many nonconforming loan types.In mid-September, National Mortgage News reported that publicly traded lenders alone had cut at least 20,000 positions during August. On Friday, the U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector fell to 428,300 positions from 455,500 in July. Revised figures show that 4,200 mortgage full-timers lost their jobs in July, not 2,100 as originally reported. The government says 76,800 jobs have been lost in the mortgage industry since the start of this year. The BLS can be found online at http://stats.bls.gov.