Originations

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.

Class B-3 of CSFB Seasoned Loan Trust 2006-1 mortgage pass-through certificates has been downgraded from BBB-minus to BB by Fitch Ratings. Fitch also affirmed the ratings on three classes in the subprime deal, while two other classes were left on Rating Watch Negative. The downgrade was attributed to changes to the rating agency's subprime loss forecasting assumptions.

Eight classes from two second-lien securitizations issued by Credit Suisse First Boston Mortgage Securities Corp. Home Equity Mortgage Trust have been downgraded by Fitch Ratings. One other class was placed on Rating Watch Negative. The negative rating actions were based on deterioration in the relationship between credit enhancement and expected losses, Fitch said.

Seven classes of LaSalle Commercial Mortgage Securities Inc. small-balance commercial mortgage pass-through certificates, series 2006-MF3, have been downgraded by Fitch Ratings. Fitch also assigned distressed recovery ratings to the downgraded classes and affirmed the ratings on six other classes in the transaction. The downgrades resulted from "additional specially serviced loans and increased loss expectations," the rating agency said.

Fitch Ratings has placed $97 billion of notes from 197 collateralized debt obligations with exposure to residential mortgage-backed securities on Rating Watch Negative. The action, which affects 902 tranches of structured finance CDOs, reflects continued deterioration in the U.S. subprime mortgage market stemming from high-risk mortgages and declining home prices. "In light of this ongoing deterioration, Fitch's RMBS group announced increased loss expectations of 21% and 26%, respectively," the rating agency said. The placement of the structured finance CDOs on Rating Watch Negative was based primarily on exposure to subprime RMBS and to other CDOs with such exposure, Fitch said. the rating agency can be found online at http://www.fitchratings.com.

Congressional policy proposals targeting the subprime mortgage crisis do not distribute the costs and benefits equitably, according to a study released by the Washington-based FreedomWorks Foundation. The study, conducted by Todd Sinai, associate professor of real estate at the University of Pennsylvania's Wharton School, found that the proposals "inappropriately reward people who made riskier decisions over those who made prudent decisions" and benefit high-income earners at the expense of others. Titled "The Inequity of Subprime Mortgage Relief Programs," the study also said that proposals to increase the conforming loan limit raise questions of fairness and boost the risk borne by Fannie Mae and Freddie Mac. The foundation can be found on the Web at http://www.freedomworks.org.

ICBA Mortgage, the mortgage corporation of the Independent Community Bankers of America, and its partner Taylor, Bean Whitaker Mortgage Corp. have unveiled their newest product offering for community banks: Complete Mortgage Solutions. CMS gives ICBA member banks access to "consultative services that deliver a comprehensive blueprint for mortgage success -- from operational workflow, staffing, and training to technology, marketing, and mortgage products," said Terry Jorde, chairman of ICBA Mortgage and president and chief executive of CountryBank USA, Cando, N.D. Steve Reukhaus, CMS project manager at Taylor Bean, said the new product "can help community bankers streamline their mortgage operations, improve efficiencies, and explore new possibilities for growth and profitability." ICBA Mortgage can be found online at http://www.icbamortgage.com, and Taylor Bean can be found at http://www.taylorbean.com.

Standard & Poor's credit analyst James Brender is expressing concerns not only about private mortgage insurers' troubled 2005-2007 books of business, but about the 2008 vintage as well. Mr. Brender says he thinks the 2008 business could be unprofitable because of falling home prices at a time when MIs are writing a high percentage of business with loan-to-value ratios over 95%. In a conference call conducted by UBS, Mr. Brender said these loans represent 40% of new insurance written for some MI companies, which he said shows a breakdown in risk management. It is because of the collapse of the piggyback market that the loans are coming to the MIs, and the companies should have taken an appropriate risk tolerance for this factor, he said. The MIs need to develop a process to help determine appropriate risk tolerances when new products come on the market, Mr. Brender said. He added that while the MIs will have to both improve risk management procedures and raise capital, improving risk management is more important. S&P can be found online at http://www.standardandpoors.com.

Fannie Mae's B-plus Bank Financial Strength Rating has been placed on review for possible downgrade by Moody's Investors Service. Moody's affirmed several other ratings on the government-sponsored enterprise: senior debt, Aaa; short-term debt, Prime-1; subordinated debt, Aa2; and preferred stock, Aa3. The rating actions followed Fannie Mae's announcement of a $3.6 billion loss for the fourth quarter and a $2.1 billion loss for all of 2007. "This loss exceeded our expectations and represents a significant deterioration of surplus regulatory capital," which stood at $3.9 billion as of Dec. 31 based on the required 30% surplus to the statutory minimum, the rating agency said. "Additionally, Moody's expects the company to record sizable losses in the first half of 2008 and possibly a net loss for the year due to the continued deterioration in the residential mortgage sector." Moody's said its concerns about Fannie's capital position were "partially mitigated" by an announcement by the Office of Federal Housing Enterprise Oversight that it will discuss with the housing GSEs a gradual decrease in the required 30% capital surplus. Moody's can be found online at http://www.moodys.com.

The mortgage industry is facing the prospect of 1.8 million foreclosures this year, up from 1.5 million in 2007, according to a prediction by the Mortgage Bankers Association's chief economist. Doug Duncan, who will soon join Fannie Mae as its chief economist, made the prediction during a panel discussion at the MBA National Mortgage Servicing Conference in New Orleans. The panel agreed that foreclosures are not just a subprime problem, but a broader economic problem affecting different regions, especially the Midwest and previously overheated markets. Amy Crews Cutts, deputy chief economist at Freddie Mac, said delinquencies and foreclosures are also rising in prime loans. Ms. Cutts said it will take time, perhaps until the third quarter, before home prices stop falling. "The recession risk is higher," she said. "And unemployment will creep up on us." Alternative-A and negative-amortization loans were also cited as possible causes for concern when they reset in 2010.

Senate Democrats have narrowed the scope of the bankruptcy provisions in a foreclosure prevention bill so that only nontraditional and subprime mortgages could be restructured by bankruptcy judges. The Democrats were pushing for a cloture vote on the bill Thursday (Feb. 28), and the financial services industry was lobbying to defeat it because of the bankruptcy provisions. The White House has threatened to veto the bill. If the Democrats can get 60 votes, it opens the door to debate and amendments before final passage. The original bill (S. 2636) would have given the bankruptcy courts the authority to reduce the principal amount or interest rate on any single-family mortgage. In trying to get Republican support, the authors limited the scope to nontraditional and subprime mortgages originated before the date of enactment. The Democrats also allow lenders to recoup any increase in the property's value if the bankruptcy filer sells the house within five years.

House and Senate banking committee leaders are close to an agreement on a Federal Housing Administration reform bill, and it could clear the way for final passage in a few weeks. "We had a very good meeting on the FHA bill," said House Financial Services Committee Chairman Barney Frank, D-Mass. "I am very optimistic that we are going to get an FHA bill pretty soon." Rep. Frank said he agreed to drop a controversial provision in the House bill that would require the FHA to contribute excess revenues to an affordable housing trust fund. It appears that the major outstanding issue is raising the maximum FHA loan limit to $417,000 or higher. Some observers expect the final bill to include a Senate provision that prohibits seller-funded downpayment assistance on FHA loans. The Mortgage Bankers Association recently signaled that it is changing its position on DPA. "A consensus of our members is moving towards the Senate position," MBA vice president Francis Creighton told MortgageWire.

Freddie Mac has reported a net loss of $3.1 billion for 2007 ($5.37 per share), compared with net income of $2.3 billion ($3.00 per share) in 2006. In the fourth quarter, Freddie Mac lost $2.5 billion ($3.97 per share), compared with a net loss of $401 million ($0.73 per share) a year earlier. During the quarter, Freddie Mac took mark-to-market losses of $2.3 billion on its derivatives portfolio and $800 million on the value of its credit guarantee asset. Credit losses totaled $499 million for the full year, including $236 million reported in the fourth quarter and $126 million in the third quarter. As a result of the problems in the U.S. housing market, Freddie has increased its total credit loss estimates to $2.2 billion for this year and $2.9 billion for 2009. Freddie Mac said it had estimated regulatory core capital of $37.9 billion as of Dec. 31, 2007, which was $11.4 billion in excess of its regulatory minimum capital requirement and $3.5 million in excess of the 30% mandatory target capital surplus mandated by the Office of Federal Housing Enterprise Oversight.

Vestin Realty Mortgage II Inc., a Las Vegas-based real estate investment trust, has announced a postponement of its board's exploration of a possible combination of the company with Vestin Realty Mortgage I Inc. Vestin II said its board made the decision based on "its evaluation of the current business environment." Both REITs are managed by Vestin Mortgage Inc.

A new industry alliance has been formed to offer information on the use of derivative products based on U.S. commercial property. Called the Real Estate Derivatives Special Interest Group, the organization has established an advisory group that includes institutional investors, portfolio managers, index providers, academics, tax advisers, banks, and brokers. "The U.S. commercial real estate market is estimated to be in excess of $6 trillion -- and is the only major asset class not currently supported by a robust derivative market," said Phil Barker, senior vice president of CBRE/GFI and the vice-chair of RED-SIG. ".... RED-SIG aims to provide easy, free access to useful and important information for any investor considering real estate derivatives in their portfolio." The group can be found on the Web at http://www.red-sig.org.