Servicing

Few investment banking firms have been as bullish on Countrywide's stock as Sandler O'Neill. But those days are over.After reviewing Countrywide's third-quarter earnings statements, Sandler O'Neill analyst Mike McMahon reduced his rating on the stock to "hold" from "buy." Among his concerns, Mr. McMahon cited a larger-than-expected servicing impairment charge booked by the company. Even though Countrywide earned $582 million, it represented a 45% decline in earnings. It also revealed a $796 million servicing impairment charge that was offset, in part, by a $591 million hedging gain. Late Wednesday, Smith Barney slapped Countrywide with a "sell" rating. Countrywide's shares sold off in trading Wednesday, falling 11.5% on the day to $33. Its 52-week high is $39.93, its low, $23.00.

Wells Fargo & Co., San Francisco, has reported net income of $1.75 billion ($1.02 per share) in the third quarter, up 12% from $1.56 billion ($0.92 per share) a year earlier, despite a 58% decline in mortgage originations.Mortgage originations totaled $68 billion in the third quarter, down $28 billion from the level recorded in the previous quarter and down $93 billion from $161 billion in the third quarter of 2003, the company said. However, Mark Oman, group executive vice president for home and consumer finance, put the best face on the results. "The advantage of Wells Fargo's multichannel, anytime, anywhere sales approach is reflected in the growth of the home equity portfolio, which is up 43% from the prior year to $46 billion," Mr. Oman said. Noting the "unusually volatile" markets in the third quarter, Wells chief financial officer Howard Atkins said the company sold approximately $4 billion of securities and adjustable-rate mortgages, resulting in $10 million of bond gains and $35 million of loan losses. The owned servicing portfolio (including commercial servicing) totaled $777 billion as of Sept. 30, up from $681 billion a year earlier. The company can be found online at http://www.wellsfargo.com.

Countrywide Financial Corp., Calabasas, Calif., has reported earnings of $582 million ($0.94 per share) for the third quarter, down 47% from $1.1 billion ($1.93 per share) in the record-setting third quarter of last year.Pretax earnings by the company's mortgage banking operations totaled $633 million in the third quarter, down from $1.41 billion a year earlier. "On a year-over-year basis, third-quarter earnings are difficult to compare given the record refinance volume and the convergence of other favorable events experienced during last year's third quarter, which generated by far the best financial results in the company's history," said Angelo R. Mozilo, Countrywide's chairman and chief executive officer. ".... In line with a reduction in volume and a loan production mix shift to lower-margin adjustable-rate product, overall production margins declined 43 basis points from last year and 12 basis points from the second quarter of 2004, to 82 basis points." Countrywide said its servicing portfolio rose to a record $786 billion, up $141 billion from the level at the start of the year. As of shortly before noon Wednesday, Countrywide's stock had fallen 13.7%, to $32.36 per share. The company can be found online at http://www.countrywide.com.

Downey Financial Corp., Newport Beach, Calif., says it will sell most of its third-party mortgage servicing rights after taking an $18.4 million impairment hit in the third quarter.In the firm's quarterly earnings report, CEO Daniel Rosenthal said that after the end of the third quarter, Downey entered into agreements to sell about 80% of its MSRs on loans serviced for others. "Virtually all of the underlying loans represent borrowers with whom we have no other business relationship," he said, adding that the sale of the third-party servicing should reduce earnings volatility in future quarters. Downey reported net income of $24.5 million in the third quarter, or $0.88 per share, down 16.2% from the third quarter of last year.

Fannie Mae estimates that half of subprime borrowers have only slightly blemished credit records, and the mortgage giant intends to be more aggressive in serving this market, according to Fannie Mae chairman and chief executive Franklin Raines."Fannie is moving ahead with a concerted effort to serve the subprime market," Mr. Raines told the America's Community Bankers annual convention. "And helping our ACB partners compete and succeed in this market is a vital part of the strategy." [It could not be immediately determined whether this would require a charter revision for the government-sponsored enterprise.] Mr. Raines noted that $323 billion of subprime loans were originated last year and the market is growing. "We estimate that about half of subprime borrowers have only slightly blemished credit and are just a notch away from qualifying for Fannie Mae's prime conventional financing," Mr. Raines said. He added that Fannie Mae could serve those subprime borrowers without lowering its credit standards. Fannie Mae can be found online at http://www.fanniemae.com, and ACB can be found at http://www.americascommunitybankers.com.

Bank of America Corp., Charlotte, N.C., has reported net income of $3.76 billion ($0.91 per share) for the third quarter, up from $2.92 billion ($0.96 per share) a year earlier, but said it had taken a $250 million loss in its mortgage banking operations.The loss in mortgage banking income resulted from lower origination volume and a writedown of mortgage servicing rights, BoA said. The company also reported that it realized $732 million in securities-related gains "as it repositioned its mortgage-backed securities to reduce mortgage prepayment risk." BoA touted its commercial MBS underwriting operations, saying it had become the top U.S. deal manager in CMBS in the first nine months of 2004. The company can be found online at http://www.bankofamerica.com.

The Pennsylvania Supreme Court needs to reconsider its decision involving bailee letters (used to facilitate sales of residential loans) in order to avoid disruption in the state's mortgage market, according to warehouse lender JPMorgan Chase Bank.Over 50% of all U.S. residential loans are shipped under a bailee letter, the New York bank says in an amicus brief on behalf of a defunct Los Angeles-based warehouse lender, Pioneer Commercial Lending Corp. Bailee letters protect a lender's ownership in loans that are being shopped to potential investors. In the Pioneer case, the purchaser erred by wiring the funds to an account of the wrong lender, which CoreStates Bank used to cover overdrafts by that lender. "The decision has effectively elevated the behavior of one party over the plain terms of the contract ... and creates the danger that lenders cannot protect themselves against potential purchasers that take liberties with the documents," the amicus brief says. The brief discloses that Pioneer has a $5 million loan from JPMorgan Chase Bank that is secured by the litigation.

The senior unsecured debt of GMAC Commercial Mortgage Bank PLC and GMAC Commercial Mortgage Japan KK has been downgraded from BBB-plus to BBB by Fitch Ratings as part of a broader downgrade of debt issued by General Motors Corp., General Motors Acceptance Corp., and related entities.Fitch also affirmed the corresponding commercial paper ratings at F2, and left the Rating Outlook at Negative. The rating agency attributed the downgrades and outlook to GM's "margin compression," weakness in its truck and car portfolios, and "significant post-employment benefit obligations." But it said GMAC's automotive and mortgage finance operations "have exceeded expectations and are projected to continue to perform well." The rating agency can be found online at http://www.fitchratings.com.

The board of directors of the Federal Agricultural Mortgage Corp., Washington, has for the first time declared a quarterly dividend on its three classes of common stock.The Farmer Mac board declared a dividend of $0.10 per share of class A and class B voting common stock and class C nonvoting common stock. The dividend will be payable on Dec. 31 to stockholders of record as of Dec. 15. The board also declared a regular quarterly dividend of $0.80 per share on the corporation's 6.40% cumulative preferred stock, series A.

The American Securitization Forum has appointed Thomas Deutsch to succeed Laura Stothmann as its associate director.Mr. Deutsch was previously an associate in the capital markets department of Cadwalader, Wickersham & Taft LLP, where he represented issuers and underwriters in residential mortgage-backed securitizations and other structured finance offerings. The forum can be found online at http://www.americansecuritization.com.