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Losses Continue

Losses ContinueRecent mortgage earnings

February 14, 2008


International losses from U.S. subprime mortgages continue to mount. Domestically, mortgage insurer losses have prompted Freddie Mac to make operational changes.

Ocwen Financial Corp. reported a loss of $13.1 million in the fourth quarter compared to a profit of $15.7 million a year earlier. Earnings were impacted by $23.6 million of unrealized losses resulting from increased loss assumptions from Standard & Poor’s on residential mortgage-backed securities.

The West Palm Beach, Fla.-based servicer said it was also impacted by rising delinquency, reducing its servicing fees. The servicing portfolio was $52.7 billion on Dec. 31, 2007, barely changed from $52.2 billion a year earlier.

MGIC Investment Corp. reported a $1.5 billion fourth quarter loss. MGIC explained that low cure rates coupled with higher loss severities and higher delinquencies impacted its quarterly and annual earnings. Most of the losses were the result of a $1.2 billion pre-tax premium deficiency reserve relating to Wall Street bulk transactions.

MGIC, which has written off its entire $0.5 billion investment in Credit-Based Asset Servicing — or C-BASS, warned a loss is also expected this year as the Milwaukee-based company embarks on a plan to raise capital.

Subsidiary Mortgage Guaranty Insurance Corp., which wrote $24 billion in fourth quarter insurance, recently cut its loan-to-values by 5 percent in markets it deems “restrictive.” The company currently has more than $211 billion primary insurance in force.

In response to losses suffered by private mortgage insurers, Freddie Mac announced today changes to its private mortgage insurer eligibility requirements to boost their claims-paying and capital retention capacities. The action was triggered by the ongoing decline in home values and the poor performance of subprime, Alt A and other higher-risk mortgages.

Freddie said as of June 1, all of its approved private mortgage insurers cannot “cede new risk if the gross risk or gross premium ceded to captive reinsurers is greater than 25 percent.” The temporary change is intended to allow mortgage insurers to retain more insurance premiums to pay current claims. In addition, Type II Insurer requirements are being suspended if the companies are downgraded below AA- or Aa3 as long as they to submitting a complete remediation plan for our review and approval within 90 days of the downgrade.

Swiss banking giant UBS reported a fourth quarter loss of CHF 12,451 million (U.S. $11.3 billion), including $10.8 billion in U.S. subprime losses on mostly super senior tranches of collateralized debt obligations and RMBS. Alt-A investments cost the company another $2.0 billion.

“Last year was one of the most difficult in our history,” UBS Chief Executive Officer Marcel Rohner said in the announcement. “The sudden and serious deterioration in the US housing market, in combination with our large exposure in sub-prime mortgage-related securities and derivatives, has driven us into loss for the year.”

Another Swiss bank, Credit Suisse, reported $0.4 billion in fourth quarter RMBS charges. Subprime RMBS exposure at the end of the quarter was $1.5 billion while subprime CDO exposure was $2.5 billion. Other RMBS non-agency exposure was $6.4 billion.


Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of


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