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Bit Servicers Face Troubled Times
By Ted Cornwell
For the nation's largest servicers, second quarter results proved a bad omen. While most reported some gains in the valuation of their mortgage servicing rights, lenders also warned that higher delinquency and loss rates are requiring them to build loan loss reserves.
While the big news in recent weeks has focused on the downfall of key subprime and even prime lenders, the nation's largest servicers of conventional mortgage loans have not gone unscathed. Both Countrywide and Washington Mutual have warned, for example, that they may have to hold more loans on their books because of difficulty selling them into the secondary market. Both say they have the liquidity to manage that problem.
Countrywide Home Loans trimmed its earnings forecast for this year and also warned that it expects to see "continued weakness" in housing markets. Like several other lenders, Countrywide said the credit deterioration that many had hoped would be limited to the subprime sector has seeped into its prime credit quality portfolio, particularly among home equity loans.
Home equity loans accounted for the bulk of a $417 million impairment charge that Countrywide took to its "credit sensitive retained interests" in the second quarter.
Chairman and CEO Angelo Mozilo warned that the softening of housing markets, which many people blame along with weak underwriting for the rise in defaults, isn't likely to resolve itself anytime soon. In fact, he expects housing to remain weak at least through next year.
"It just takes a long time to turn a battle ship around, and this is a huge battle ship and it's headed in the wrong direction," Mr. Mozilo said.
Other big firms, including JPMorgan Chase, also cited weakening home equity performance as an area of credit concern.
Washington Mutual reduced the value of its residual interest in subprime loans that have been sold by $93 million in the second quarter. In addition, the company - like many of its peers - has scaled back production of risky loan products by tightening underwriting and eliminating some loan products.
Mega-servicer Wells Fargo, which has been lauded for its conservative underwriting, did not go entirely unscathed either. But the company said its exposure to subprime home loans only reduced earnings by $35 million in the second quarter, a big drop from the $135 million subprime hit the company took in the first quarter.
But even with rates ticking up, market volatility can play tricks on interest-rate risk managers as well. Wells said it suffered a $225 million loss on the hedging of its mortgage servicing rights in the second quarter.
Sure, things could have been worse for the industry. But most big lenders found the second quarter was a time to highlight performance from units other than mortgage banking in their earnings reports.
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