Origination

Hope Now servicers modified 45,000 subprime loans in January, up 16% from December's level, and Treasury Secretary Henry Paulson said he expects the numbers to increase now that all the servicers have adopted the American Securitization Forum's protocol for fast-tracking subprime borrowers into loan modifications and refinancings. "I am pleased to announce that as of today, all of the Hope Now members that service subprime mortgages have the protocol in place, ahead of the rising volume of resets in the coming months," Secretary Paulson told the National Association of Business Economists. The Treasury secretary stressed that government-led efforts to prevent foreclosures should be focused on borrowers struggling to make their payments or facing a reset they cannot afford. And he threw cold water on a proposal to restructure "underwater" mortgages so the borrowers have an incentive to stay in their homes. "Any homeowner who can afford their mortgage payments but chooses to walk away from the underwater property is simply a speculator -- and one who is not honoring his obligation," Mr. Paulson said.

The Office of the Comptroller of the Currency will require large national banks that service mortgage loans to provide comprehensive monthly data about their portfolios. The OCC said the reporting requirement will build upon the efforts of the Hope Now alliance, a cooperative initiative among investors, mortgage servicers, and counselors to help distressed homeowners. In a letter to nine large national banks that account for the overwhelming majority of mortgages serviced by national banks, Comptroller John Dugan said the data will help the OCC assess the banks' servicing activities in light of rising loan defaults and foreclosures. The OCC said its data collection includes all mortgage loans, not just subprime loans.

Defaults on securitized subprime mortgage loans jumped to 23.3% in December, up 200 basis points from the level of the previous month and more than double the 10.1% rate of a year earlier, according to a Friedman Billings Ramsey Investment Management report. The credit performance of private-label securities backed by subprime, alternative-A, and prime mortgages is "deteriorating more rapidly and more broadly than previously," said FBRIM managing director Michael Youngblood. He attributes the acceleration in defaults to "weakening labor market conditions and falling house prices." In the 25 metropolitan statistical areas with the highest default rates, the average unemployment rate was 6% and the MSAs had a net loss of 104,240 jobs over the previous year, according to the monthly credit performance report. Meanwhile, the default rate on alt-A loans rose to 7.2% in December, up 153 bps from that of the previous month and 555 bps from the rate in December 2006. (The default rate includes loans 90 days or more past due, loans in foreclosure, and real estate-owned.)

More than 350 additional classes of first-lien subprime mortgage pass-through certificates were downgraded by Fitch Ratings on Feb. 28 as a result of changes to its subprime loss forecasting assumptions. Fitch also affirmed the ratings on classes with outstanding balances of $6 billion. The securities affected by the latest downgrades were 208 classes from 19 J.P. Morgan deals and 150 classes from 12 First Franklin deals. The rating actions were attributed to changes to Fitch's subprime loss forecasting assumptions that "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness." Fitch can be found on the Web at http://www.fitchratings.com.

JPMorgan Chase's retail financial services unit is looking for continued gains in its mortgage market share, but it has some concerns about the related home equity area where losses are continuing to trend higher. In a retail financial services presentation from its "investor day" meeting, the company indicated that it expects to add to its loan loss reserves in the first quarter as a result.

The First American Corp., Santa Ana, Calif., has reported a net loss of $67.5 million for the fourth quarter ($0.74 per share), compared with net income of $104.0 million ($1.06 per share) a year earlier. For the full year, the company lost $3.1 million ($0.03 per share), compared with net income of $287.7 million ($2.92 per share) in 2006. The fourth quarter included a reserve-strengthening adjustment of $122.3 million due to adverse claim development and restructuring expenses of $25.6 million, First American reported. The title insurance segment had a pretax loss of $185.7 million in the fourth quarter, compared with pretax income of $122.7 million a year earlier. The loss provision for claims went from 5.6% of operating revenues in the fourth quarter of 2006 to 14.6% of operating revenues in the most recent period due to higher expected ultimate losses for the book of business written from 2004 to 2006. First American's title business had operating revenues of $1.2 billion for the fourth quarter, down from $1.5 billion a year earlier. First American can be found online at http://www.firstam.com.

Conditions in the residential construction market are likely to worsen in 2008, with housing starts falling another 25%, according to a research report from the Portland Cement Association. The large number of foreclosures caused by the subprime mortgage crisis will be a major contributor to rising home inventories, which will depress construction activity, said Edward J. Sullivan, PCA's chief economist. "Typically, builders accelerate start activity when the inventory supply reaches five months," Mr. Sullivan said. "A significant improvement in sales and inventory conditions is not expected until the second half of 2009." The economist projected that the housing inventory is likely to stand at a 9.5- to 10-month supply by the end of this year. PCA can be found on the Web at http://www.cement.org.

American International Group Inc., the New York-based parent company of mortgage insurer United Guaranty Corp., has reported a net loss of $5.29 billion ($2.08 per share) for the fourth quarter, compared with net income of $3.44 billion ($1.31 per share) a year earlier. The company took a pretax charge for the quarter of $11.12 billion for a net unrealized market valuation loss related to AIG Financial Products Corp.'s super-senior credit default swap portfolio. AIG also took a $2.63 pretax loss for other-than-temporary impairment charges to its investment portfolio and a $643 million pretax other-than-temporary impairment charge to AIGFP's available-for-sale investment securities portfolio. "Continuing market deterioration would cause AIG to report additional unrealized market valuation losses and impairment charges," said AIG president and chief executive Martin J. Sullivan. "However, with a diverse portfolio of global businesses, a strong capital base, and outstanding talent, AIG has the ability to absorb the current volatility while committing the resources to grow and take advantage of opportunities." AIG's mortgage insurance subsidiary, United Guaranty, took an operating loss of $348 million for the quarter, compared with operating income of $27 million for the same period last year.

CNBC has reported that Merrill Lynch plans to close its struggling San Jose, Calif.-based First Franklin wholesale mortgage unit, but a Merrill spokesman would not comment on the matter and a customer service representative at the unit said the business was operating as normal. Like many wholesalers initially reliant on subprime loans that have recently turned in very poor performance records, First Franklin has already seen massive cuts. Merrill bought First Franklin, direct-to-consumer lender NationsPoint, and a Pittsburgh-based servicing division later renamed Home Loan Services from National City Corp. for about $1.3 billion early last year. First Franklin, which has been funding little but HLS, had $47.4 billion in servicing in the fourth quarter.

Senate Republicans have blocked Democrats from rushing to the floor a foreclosure prevention bill that allows bankruptcy judges to restructure subprime and certain nontraditional mortgages. Democrats mustered only 48 of the 60 votes needed to invoke cloture and start debate on the bill (S. 3221), which also provides revenue bonds for refinancing subprime borrowers and federal grants to purchase foreclosed properties. Senate Majority Leader Harry Reid called the vote a "big victory" for Wall Street, big banks, and mortgage bankers. But as for the millions of people facing foreclosure, "they lost," Sen. Reid said. The American Financial Services Association's top lobbyist, Bill Himpler, said the industry could support the foreclosure prevention bill if the bankruptcy provision is stripped from the package. With all the market turmoil, this is not the time to consider changes to the bankruptcy code that would "essentially undermine investor confidence in mortgage lending," he said. The Democrats will likely push for another vote before March 15, when the Senate takes a two-week break. Meanwhile, the Senate Judiciary Committee has scheduled a March 6 mark-up of two competing mortgage bankruptcy bills. The bill sponsored by Sen. Richard Durbin, D-Ill., was included in S. 3221. The other bill, sponsored by Sen. Arlen Specter, R-Pa., allows bankruptcy judges to reduce or freeze the interest rate on adjustable-rate mortgages.