Servicing

Meanwhile, a new Fitch Ratings report says the recent rise in U.S. loan repurchase activity is likely a "self-correcting mechanism" rather than the beginning of a troubling trend.Although early payment defaults were the root cause of rising repurchases, the report contends that secondary-market behavior was largely responsible for the unexpected repurchase provisions recognized by some mortgage originators. "Fitch explores the accounting for mortgage loan repurchases and suggests that investors would benefit from more disclosure, especially where repurchase charges spike and materially affect earnings," the rating agency said. Although the effect of alternative mortgage products and adjustable-rate mortgage resets has yet to be felt, Fitch said it views the recent repurchase uptick as a rational, self-correcting mechanism. But in the longer term, as originators take steps to prevent early payment defaults, Fitch said loan repurchase activity should normalize. Vincent Arscott, a director in Fitch's financial institutions group, said mortgage originators are tightening underwriting guidelines to prevent loan repurchase requests as a result of EPDs.

The loan buyback scourge that's been sweeping through the nonconforming mortgage sector is only about half over, according to one veteran subprime executive.Speaking on a recent conference call, Accredited Home Lenders executive vice president Stuart Marvin estimated that "we're probably in the middle of the repurchase activity lifecycle." He said there is now an increased focus and scrutiny on stated-income loans, credit scores, and mortgages with high loan-to-value ratios. A top-15-ranked subprime funder based in San Diego, Accredited saw its loan buybacks jump to $38.6 million in the second quarter, a 145% increase from the level recorded a year earlier. Mr. Marvin said the problem is "clearly manageable" for Accredited. "It's under focus and being dealt with on a daily basis," he said. The conference call he spoke on was hosted by investment banker Friedman, Billings, Ramsey. FBR recently closed its asset-backed securities underwriting unit.

Two classes of First Franklin Financial Corp. residential mortgage-backed certificates, series 2002-FF1, have been downgraded by Fitch Ratings, and two classes from another deal have been placed on Rating Watch Negative.Class M-2 was downgraded from A to A-minus, and class M-3 was downgraded from BBB to BBB-minus. Class M-4 and class B of series 2003-FF3 were placed on Rating Watch Negative. The downgrades were attributed to a deteriorating relationship between credit enhancement and expected losses. The collateral for the transactions consists of first-lien subprime loans divided into two collateral groups, the first containing loans with principal balances that conform to Fannie Mae and Freddie Mac guidelines and the second containing loans that may or may not conform to the guidelines.

The Federal Agricultural Mortgage Corp. has announced that it will restate earnings for the last three years to correct errors in hedge accounting.Farmer Mac said the restatement for 2003 through 2005 reflects the company's interpretation of Statement of Financial Accounting Standards No. 133, which covers derivatives and hedging instruments. The government-sponsored enterprise determined that its documentation did not support the use of hedge accounting for derivatives used to manage interest rate risk. Therefore, changes in the fair value of its derivatives should have been included in the statements of operations rather than being deferred or offset. While earnings will change under generally accepted accounting principles as a result, Farmer Mac said the restatement will have an "insignificant" effect on the company's financial position, stockholders' equity, cash flows, and business model. Farmer Mac also said the restatements will not have a significant effect on its capital position or its "core earnings," a non-GAAP measure of profitability. Farmer Mac can be found online at http://www.farmermac.com.

Employment in the mortgage industry inched up in August as mortgage rates declined, home sales leveled off, and refinancing activity edged up to 40% of loan applications.The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector increased by 200 full-time positions to 502,000 in August, up from 501,800 in July. (The BLS revised the July employment number downward from 502,100.) Rates on fixed-rated 30-year mortgages steadily declined throughout August, from 6.63% to 6.44%, while existing- and new-home sales leveled off after multimonth declines. The Mortgage Bankers Association recently reported that the number of loans closed per loan officer dropped 9% in 2005 to 83 loans per year. MBA vice president Jay Brinkman said mortgage companies are facing lower sales productivity this year. The BLS can be found online at http://stats.bls.gov.

Three classes from Credit Suisse First Boston Mortgage Securities Corp. commercial mortgage pass-through certificates, series 2001-CF2, have been downgraded by Moody's Investors Service.The downgrades were as follows: class L, from Caa1 to Caa2; class M, from Caa3 to Ca; and class N, from Ca to C. In addition, Moody's upgraded one class from the deal and affirmed the ratings on 12 others. The downgrades were attributed to realized and expected losses on four specially serviced loans. The pool consists of 142 mortgage loans secured by commercial and multifamily properties. The rating agency can be found on the Web at http://www.moodys.com.

Luminent Mortgage Capital Inc., San Francisco, has announced a $435 million repurchase agreement with Barclays Capital that will be used to acquire triple-A-rated mortgage-backed securities.The facility has a term of up to two years. The company said it will "help shield Luminent from liquidity risk" by diversifying its financing facilities and reducing its reliance on short-term repurchase financing. The company can be found online at http://www.luminentcapital.com.

Chase has selected Fidelity National Information Services Inc.'s Mortgage Servicing Package to replace and upgrade multiple legacy software platforms for servicing its $600 billion portfolio.Chase services its own loan portfolio and provides servicing for third-party loans. FNIS said Chase will replace and upgrade the systems over the next two years to streamline business processes and provide faster rollout and better support for new products. The updated system is expected to reduce costs, handle larger volumes, and improve disaster recovery capability. A leading mortgage lender, Chase originated $128 billion in mortgage loans and $54 billion in home equity lines and loans in 2005. It also purchases servicing rights to mortgage portfolios. Jacksonville, Fla.-based FNIS said its Mortgage Servicing Package automates all areas of mortgage servicing, including loan setup and maintenance, cashiering, escrow administration, investor accounting, and regulatory reporting. FNIS can be found online at http://www.fidelityinfoservices.com.

The profitability of mortgage bankers fell 61% on a per-loan basis in 2005 as origination costs increased by 38%, according to a Mortgage Bankers Association study, but loan servicing turned in a "stellar" performance.Profitability dropped from $657 per loan in 2004 to $258 in 2005, while origination costs increased from $1,485 per loan in 2004 to $2,049 last year, the MBA reported. "The year 2005 demonstrated the challenges that mortgage companies are still facing in 2006," said MBA vice president Jay Brinkman. "These challenges include narrowing warehouse interest spreads, lower sales productivity, and higher per-loan sales and fulfillment costs." However, servicing profits jumped from $21 per loan in 2004 to $104 last year. "The largest servicers outperformed their smaller peers both operationally and financially, with lowest cost to service and highest net servicing financial income," the MBA study says. The association can be found online at http://www.mortgagebankers.org.

Two classes from two GS Mortgage Securities Corp. residential mortgage pass-through certificate deals have been placed on Rating Watch Negative by Fitch Ratings.The affected classes are class B-3 of series 2005-S2 and class B-2 of series 2006-S1. The rating actions were taken because losses have exceeded excess spread for the past three months, Fitch said. The collateral in the transactions consists of closed-end, fixed-rate loans secured by second liens on residential properties.