Servicing

At the MBA's National Secondary Market Conference in Washington, D.C., the issue of fair valuation of mortgage servicing rights to create a more balanced financial picture of mortgage banking businesses was debated.FASB has proposed an amendment to accounting rules that would make it possible for mortgage servicing rights to be quantified at fair value so that these rights can be a part of a company's financial statement. Supporters said that under current rules the only way to value servicing rights is to sell the asset, which is counterproductive because it eliminates the possibility for retaining the customer for cross-selling purposes. Detractors believe the rule doesn't go far enough and will drive small servicers out of business because of ambiguities in the rule as it is stated. FASB is evaluating all viewpoints and has not initiated a formal amendment at this time.

Concerns that homeowners tapped themselves out during the recent refinance binge are overblown, according to Washington area mortgage banker Robert Broeksmit.Far from being over-leveraged and becoming a drag on the economy, consumers have "rearranged their balance sheets" and are now "in an even better position" to keep the country humming for years to come, the president of B.F. Saul Mortgage Co. said at the Mortgage Bankers Association's National Secondary Market Conference and Expo. Even though an uptick in interest rates has "choked off" refinancing for the moment, homeowners "still have room to leverage up" because the typical borrower's loan-to-value ratio is below 60%, Mr. Broeksmit said during a panel session. Rather than spending their equity on frivolous items, consumers who have refinanced have exhibited financial prudence, he also said, pointing to a study by the New York Federal Reserve that found only 16% of the $450 billion in withdrawn equity has been laid out for travel and automobiles. The rest was put into home improvements, paying off high-cost debts and investments in stock and real estate, according to the study.

Wells Fargo & Co., the nation's largest mortgage servicer, reported record net income of $1.8 billion in the first quarter, or $1.03 per share, up 18% and 17% from the first quarter of last year, respectively.But Wells Fargo Home Mortgage saw its revenue fall amid lower mortgage lending volume. Revenue from Wells Fargo's mortgage unit was $800 million in the first quarter, one-third lower than during the first quarter of 2003. Wells originated $65 billion of home loans in the first quarter. The company expects to see stronger loan origination activity in the second quarter due to a drop in interest rates in March. Wells took $119 billion in home loan applications in the first quarter, up from $46 billion in the fourth quarter of last year. And the company owned a portfolio of mortgage servicing rights on $725 billion of home loans, up 19% from a year earlier. The company valued its MSR portfolio at $6.1 billion, down from $6.9 billion at the end of 2003.

Washington Mutual earned $1.05 billion, or $1.18 per diluted share in the first quarter, up 10% on a per share basis from one year earlier.WaMu's first quarter results included a $644 million pretax income from the sale of its former subsidiary, Washington Mutual Finance Corp., offsetting pretax restructuring and technology related charges of $68 million, a pretax charge of $89 million related to the early retirement of high-cost FHLB borrowings, and a pretax reduction of $107 million as a result of a one-time effect from a change in accounting for gain from mortgage loans. Income from mortgage banking was $220 million, less than half of the $497 million in mortgage banking income reported in the first quarter of last year. Adjustable-rate mortgages accounted for 53% of WaMu's $47.9 billion in home loan volume during the quarter. WaMu reported $920 million of impairment, amortization and other reductions in the value of its mortgage servicing rights during the quarter, but this was offset by hedging gains. WaMu increased its common share dividend by one penny to $0.43 per share, payable May 14 to shareholders of record as of April 30.

Fitch Ratings, New York, said it is "concerned with the used of non-full appraisals to value properties in declining markets."As a result Fitch has identified property valuation type as an additional factor in assessing the credit risk of underlying collateral in mortgage-backed securities. The agency believes that with automated valuation models, the risk of property overvaluation is great in declining markets. This is because the data relied upon in the model could be several months old. This is also true for desktop appraisals. Drive-bys are very limited in scope, which Fitch said hinders their accuracy. In markets the rating agency classifies as "weak or soft," Fitch will decrease the values of mortgage properties. This could require a higher level of credit enhancement for that loan. The current list of markets Fitch considers to be "weak" are Salt Lake City-Ogden, Utah; San Jose, Calif. and Denver. Soft markets are the Memphis metropolitan area; the Charlotte, N.C., metropolitan area; Albuquerque; Atlanta; Grand Rapids-Muskegon-Holland, Mich.; Detroit; the Cincinnati metropolitan area; Dallas; Greenville-Spartanburg-Anderson, S.C.; Akron, Ohio; Indianapolis; Dayton-Springfield, Ohio; The Cleveland metropolitan area; Columbus, Ohio; Toledo, Ohio; Baton Rouge, La.; San Francisco; Columbia, S.C.; Tulsa, Okla. and Houston.

The value of mortgage servicing rights "materially declined" in the first quarter, according to an analysis by New York-based MIAC.Market prices for most classes of generic servicing assets tracked by MIAC "have continued to erode as a result of another low interest rate environment and prepayment speeds reminiscent of last September," MIAC said in its MSR monthly update. MSRs on conventional 30-year mortgages lost an average of 9% over the quarter, with the average value falling to an average of 2.95 times the servicing fee for the asset. However, in recent weeks MSR values have edged upward as a result of rising interest rates. MIAC is located at http://www.servicing.com on the Internet, and a sample of MIAC's Generic Servicing Asset valuations, updated daily, can also be found on our website by clicking on Servicing News icon to the left.

Northern Trust, Chicago, has announced its appointment by Mortgage Guaranty Insurance Co., Milwaukee, to provide domestic custody services for $5.5 billion in general insurance assets.Northern Trust is a provider of custody, asset administration, and investment management services. The companies can be found on the Web at http://www.northerntrust.com and http://www.mgic.com.

At least four separate securities lawsuits have been filed against subprime residential mortgage lender NovaStar Financial Inc., Kansas City, Mo., in the U.S. District Court for the Western District of Missouri.The actions, filed on behalf of shareholders, charge that head officers and directors artificially inflated the market price of securities throughout the class period, between Oct. 29, 2003, and April 8, 2004. The stock hit a high of $67 per share during that period. The complaint alleges that NovaStar overstated the number of its branches in existence and conducted business in states (such as Nevada) where it didn't have a license. NovaStar has retained the services of Orrick, Herrington & Sutcliffe LLP to defend the company against the suits, which were filed following adverse reaction to recent articles on NovaStar's stock in the news media, the company said.

Four classes of PNC Mortgage Securities Corp. mortgage pass-through certificates have been downgraded by Fitch Ratings.The downgrades were as follows: series 1999-9 group 1, class IB5, from B-minus to CCC; series 1999-9 groups 2, 3, and 4, class CB4, from B to CCC; series 2000-3, class DB3, from BBB to BB (and removed from Rating Watch Negative); and series 2000-3, class DB4, from CCC to CC. Fitch also upgraded nine classes and affirmed the ratings on 41 classes in eight PNC deals. The rating agency attributed the downgrades to loss levels and high delinquencies relative to applicable credit support. Fitch can be found online at http://www.fitchratings.com.

Class F of Salomon Brothers Mortgage Securities VII Inc. mortgage pass-through certificates, series 1996-C1, has been downgraded from B-plus to CCC by Fitch Ratings.Fitch also upgraded one class and affirmed the ratings on four other classes in the deal. The downgrade is due to the deteriorating performance of the Clubhouse Inn loan portfolio, which is secured by five hotel properties, the rating agency said. Fitch can be found online at http://www.fitchratings.com.