Servicing

The Nonprime Mortgage Report default risk index rose slightly to 103 this quarter, according to University Financial Associates of Ann Arbor, Mich.The index measures the risk of default on newly originated nonprime credit quality mortgage loans, UFA said. "The index has been flat for over a year because falling interest rates, which reduce payment burdens for borrowers, are offsetting the eroding prospects for the underlying housing collateral," said Dennis Capozza, professor of finance at the University of Michigan and a principal in UFA. A reading of 103 means that the risk of default on new loans is only 3% higher than the average risk on nonprime loans originated during the 1990s. The analysis is based on a "constant quality" loan, measuring the impact of economic conditions at the time of loan origination.

Moody's Investors Service says that a build up of excess credit support is benefiting subordinate certificates in home equity securitizations.The build up of excess credit support allows subordinate note holders to receive principal payments before more senior mezzanine certificates in some transactions, the rating agency said. The phenomena is the result of record high prepayment rates due to refinancing. This seeming anomaly is a by-product of a structural feature of most senior/subordinate home equity transactions, which releases excess credit support to the subordinate classes after a step-down date, Moody's said.

Following on the heels of a similar report from OFHEO, Freddie Mac reported that its conventional home price index slowed in the first quarter.However, Freddie Mac pegged the annualized rate of growth at 5.1% in the first quarter based on its "repeat sales" index, significantly higher than the 3.77% estimate from OFHEO. Freddie Mac's index suggests home price appreciation has only slowed modestly since the fourth quarter of last year. Freddie found that home prices are rising faster on the Pacific Coast and Mid-Atlantic regions than in other parts of the country.

Fairbanks Capital Corp., the nation's largest subprime subservicer, charged borrowers "improper fees" on Fannie Mae-owned loans, according to a new audit conducted by the secondary market giant.Responding to a request by Sen. Paul Sarbanes, D-Md., Fannie audited Fairbanks' servicing practices on its loans, discovering, among other things, that the company had inadequate controls and inadequate dispute resolution practices. A letter written by Fannie Mae chairman Franklin Raines to Sen. Sarbanes notes that Fairbanks has agreed to "implement remedial actions" and "fairly compensate any borrowers charged inappropriate or improper fees." Sen. Sarbanes said the agreement between Fannie Mae and Fairbanks "represents a dramatic step toward preventing the abuses that have been so harmful to homeowners..." Freddie Mac is conducting a similar review of Fairbanks' servicing practices and plans to report its findings to the Maryland Senator "shortly," a spokesman said. Fairbanks, based in Salt Lake City, also is reviewing its portfolio and it has pledged to resolve consumer disputes in an equitable manner, a spokeswoman said.

Zacks.com, a Chicago-based stock rating firm, has given a "buy" rating to Washington Mutual.Noting that WaMu reported record earnings of $1 billion, or $1.07 per share in the first quarter, Zacks said that several analysts have been "slightly bumping up" earnings estimates for WaMu for this year and next. Even with the stock close to a 52-week high, Zacks said that if the market remains bullish, analysts believe WaMu has "plenty of room for appreciation." WaMu, with servicing rights on $728 billion of home loans as of March 31, is the nation's largest mortgage servicer. It also originated more home loans than any other lender in the first quarter.

Home prices continued to rise in the first quarter of this year, but the pace of appreciation is slowing down, according to the Office of Federal Housing Enterprise Oversight.Average U.S. home prices rose 6.48% between the first quarter of 2002 and the first quarter of 2003, according to OFHEO's quarterly home price index. However, appreciation slowed in the first quarter of this year to 3.77% on an annualized basis, according to OFHEO. That's the lowest reading in five years, continuing a trend toward gradual deceleration of home price gains. On the bright side, all states showed positive growth during the quarter. Also, OFHEO announced that it is adding a house price calculator to its website, at http://www.ofheo.gov.

The PMI Group Inc., Walnut Creek, Calif., has announced the approval of an amendment to the indenture for certain of its debt securities that excludes Fairbanks Capital Holding Corp. as a "designated subsidiary" of PMI.The company completed a consent solicitation involving the amendment, which changes the definition of a designated subsidiary in the indenture for its 2.50% senior convertible debentures due 2021 by excluding Fairbanks Capital Holding, its subsidiaries, and any of their successors. It also increases from 15% to 25% the percentage of consolidated assets a subsidiary must represent to constitute a designated subsidiary. "As a result of the amendment, any failure to pay indebtedness at maturity or default with respect to indebtedness for borrowed money by Fairbanks or any of its subsidiaries will not constitute events of default under the indenture," PMI said. PMI is a majority owner of the Salt Lake City-based Fairbanks Capital, which has been the target of lawsuits regarding its servicing practices and of reviews by the Department of Housing and Urban Development and the Federal Trade Commission.

Eighteen classes from eight UCFC manufactured housing transactions have been downgraded by Fitch Ratings, which cited uncertainty surrounding the servicing operation since UCFC's chapter 11 bankruptcy filing in 1999.The affected certificates were the M and B-1 classes of series 1996-1, 1997-1, 1997-2, 1997-3, 1997-4, and 1998-1 and the M-1, M-2, and B-1 classes of series 1998-2 and 1998-3. Fitch also affirmed the ratings on 15 other classes in the eight deals. The rating actions reflect the poor performance of the loans and the servicing-related uncertainty, Fitch said. The rating agency said EMC Mortgage Corp. acquired the servicing rights for UCFC's manufactured housing portfolio in 2000, but that "loss severities continue to be high" as a result of "the difficult environment in the manufactured housing industry." United Companies Financial Corp. exited the manufactured housing business in October 1998. Fitch can be found online at http://www.fitchratings.com.

Two consumer critics of Fairbanks Capital Corp. and its servicing practices have made peace with the nation's largest subprime servicer after getting commitments from the company and its major investors that they will work to resolve consumer disputes.Craig Kenney and Brian Barr said in a news release that they have settled all outstanding litigation and other issues with Fairbanks. "Because we believe that Fairbanks and its primary shareholders are fully committed to addressing and resolving issues raised by a number of borrowers, we will consult with the company in our role as independent consumer advocates to provide advice to the company on implementation of its comprehensive effort to revamp its practices," Mr. Kenney and Mr. Barr said. The Salt Lake City servicer said it is "pleased" to have reached a settlement with its two major critics, who waged a public relations campaign against the company for the past two years. "As part of the settlement, they will provide their views on the company's comprehensive plan to change and improve its loan servicing," Fairbanks said.

Eaton Vance Corp., Boston, has announced a $2 billion initial public offering of common shares of a closed-end fund that will invest in mortgage-backed securities, among others.Eaton Vance Limited Duration Fund issued 101 million shares at an initial price of $20 per share and will trade on the American Stock Exchange under the symbol EVV, the company said. Eaton Vance said the fund plans to use financial leverage initially equal to about 34% of gross assets, which would bring the fund's total assets to approximately $3 billion. "With interest rates on U.S. Treasuries recently at 40-year lows, many investors are increasingly concerned about the possibility of rising rates associated with economic recovery," said James B. Hawkes, chairman and chief executive officer of Eaton Vance. "In the current environment, it may be prudent for investors to shorten the duration of their portfolios to reduce exposure to future changes in interest rates." The company said the fund expects to maintain a duration of two to four years under normal conditions. In addition to MBS, it will invest in senior, secured floating-rate loans and corporate bonds that are below investment-grade quality.