Servicing

The Federal Home Loan Bank of Chicago has reported a 23% drop in profits for 2006, and the bank says it expects "significantly lower net income" this year as it continues to operate under a supervisory agreement.The $86.7 billion-asset FHLBank reported annual earnings of $188 million in 2006, down from $244 million in 2005 and $365 million in 2004. "The current interest rate environment and planned declines in capital stock and Mortgage Partnership Finance program asset balances will continue to present significant earnings challenges," said Mike Thomas, Chicago FHLBank president and chief executive officer. The Chicago bank redeemed $1.2 billion in capital stock last year, and its MPF holdings of single-family loans declined by 9.8%, to $37.9 billion as of Dec. 31. In a filing with the Securities and Exchange Committee, the bank says it has implemented most of the requirements of a June 2004 supervisory agreement. "We still need to implement certain recommendations related to our market risk modeling," the 10-K filing says.

The 12 Federal Home Loan Banks reported combined 2006 earnings of $2.6 billion, up 3% from the previous year, due to a slowdown in member borrowings, declines in their mortgage investments, and a large increase in retained earnings.Member borrowings or advances grew by only 3% last year, to $641 billion, while the FHLBank holdings of residential mortgage loans fell 7% to $98.0 billion, reducing interest income. Under pressure from their regulator, the FHLBanks raised retained earnings by $543 million last year to $3.1 billion as of Dec. 31. Meanwhile, the Federal Home Loans Banks made $295 million in annual contributions to their affordable housing programs as required by law.

The subprime default rate rose to 10.52% in January, up 40 basis points from that of December, and the foreclosure rate on securitized subprime loans hit 4.33%, according to researchers at the investment banking firm Friedman Billings Ramsey.The default rate increased from 6.83% in January 2006 to 10.12% in December, with a monthly surge of 101 bps in November. FBR managing director Michael Youngblood said he does not expect to see another similar urge. "We expect rather a slow upward drift of default rates to 10.97% by December 2007," he said. FBR defines defaults as loans 90 days or more past due, foreclosures, and real estate owned. The investment banking firm is based in Arlington, Va.

New Century has unveiled its long-expected bankruptcy reorganization, saying it has agreed to sell its servicing assets and platform to Carrington Capital Management for $139 million, subject to court approval.The company also said that CIT Group and Greenwich Capital have agreed to provide up to $150 million of "debtor-in-possession" financing to keep the company in business during the reorganization. New Century said it will cut 3,200 jobs (more than half its work force) immediately. "The agreement to sell our servicing assets to Carrington is a significant and positive development, as it provides stability for holders of certain securities issued by New Century and Carrington's securitization trusts," said Brad A. Morrice, president and chief executive officer, in the company's announcement. The company said the Carrington deal will be subject to higher and better offers pursuant to Bankruptcy Court procedures. New Century can be found on the Web at http://www.ncen.com.

CoreLogic, a Sacramento, Calif.-based provider of mortgage risk assessment and fraud prevention solutions, said at the MBA's National Technology in Mortgage Banking Conference and Expo, Tampa, Fla., that loan defaults are on the rise and a large number of lending institutions are left to foot the bill.According to a recent FBI report, the first half of 2006 saw 600,000 borrowers go into foreclosure. In many cases, the lender had been misled about the borrower's ability to repay the loan and the resulting foreclosure created a financial burden for lenders with consequences reverberating throughout the mortgage economy. In an effort to combat this problem, technology is available to evaluate the borrower's ability to pay through the life of the loan, the company said. CoreLogic recently released a new product, IncomePro, which helps lenders validate a person's income using multiple sources, without needing borrower documentation or approval. IncomePro also uses the borrower's current residence and previous addresses to derive an affordability progression by using income composition at the neighborhood level. CoreLogic can be found on the Web at http://www.corelogic.com.

Impac Mortgage Holdings, Irvine, Calif., has formed a new subsidiary to acquire, restructure, and remarket nonperforming mortgage loans and real estate property.Impac CEO Joseph Tomkinson said the unit is being created "in anticipation of deterioration in the mortgage market." The new unit, to be called Arch Bay Group, will be led by Shawn Miller, president, and Steven Davis, chief financial officer. Both were founders of 3 Arch Financial Services, which specialized in providing default services for banks and mortgage servicers. Mr. Tomkinson said the new unit is designed to take advantage of third party capital and Impac's infrastructure to purchase non-performing loans. "With the dramatic increase in the number of mortgage defaults and the pressure warehouse lenders are giving their clients to sell mortgage loans, we believe there is an attractive opportunity to be a buyer of these non-performing loans," Mr. Tomkinson said. Impac's website is located at http://www.impaccompanies.com/.

Fulton Financial Corp. of Pennsylvania said it will take a $5.5 million pretax charge in the first quarter because of early payment defaults on 80/20 stated-income loans it sold into the secondary market.The publicly traded depository said it has been asked to repurchase $22 million in 80/20 loans, all of which were funded last year. (The minimum Fair Isaac & Co. credit score on the product was 620.) Another $72 million in these loans are "subject to potential repurchase," it said in a statement. The bank suspended the loan program in February after having originated $247 million in such loans in 2006, and another $22 million this year. The loans were sold to secondary investors by FFC's affiliate, Resource Bank. The investors were not identified. FFC is based in Lancaster.

Moody's Investors Service has downgraded two certificates from a subprime mortgage transaction issued by Structured Asset Securities Corp., series 2005-AR1.Class B1 has been downgraded from Baa3 to Ba1 and class B2 has been downgraded from Ba1 to B1. "The two most subordinate certificates from the transaction have been downgraded because existing credit enhancement levels are low given the current projected losses on the underlying pools. The pools of mortgages have built up a large delinquency pipeline and future loss could cause a significant erosion of the overcollateralization," Moody's said. The transaction consists of first-lien adjustable- and fixed-rate loans originated primarily by wholesaler Argent Mortgage Co. LLC, according to the rating agency. In addition, Argent's retail affiliate Ameriquest Mortgage Co. originated loans comprising 4% of the pool.

Standard & Poor's Ratings Services estimates that the expected loss level for deals issued in 2006 is between 5.25% and 7.75%.S&P said that while most "BBB" and "BBB-" rated classes are protected from losses, securities in those rating categories are likely to see higher default rates than other similarly rated securities in recent history. S&P arrived at its estimate by comparing deals issued in 2006 with those issued in 2000, noting that the 2006 deals have performed similarly to the 2000 deals during their first year.

Fitch Ratings says that the liquidity pressure currently squeezing the subprime residential mortgage sector may affect their loan servicing operations.Fitch has already lowered the servicer rating on several nonprime lenders, among them AMC Mortgage Services and NovaStar Mortgage, and the rating agency advised in a recent report that the financial condition of a servicer's parent is an important component in rating a servicing operation. Senior director Mary Kelsch said the financial strength of a company is important because it affects the servicer's ability to remain in business and continue making investments in infrastructure, systems and staffing to meet current and future servicing needs in the troubled nonprime sector. "Any servicer that has predominantly subprime credit quality loans in portfolio could find its timelines and overall cost to service facing increased levels not seen in recent history," she said.