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Economics of Mortgage Lending

Economics of Mortgage Lending

Recent mergers, acquisitions and other corporate activity

September 20, 2007



photo of Coco Salazar
Recent moves to improve liquidity at Thornburg Mortgage Inc. weren’t enough to stop one ratings agency from warning about possible debt downgrades, while IndyMac Bancorp Inc. saw its debt downgraded to junk status. Freddie Mac has agreed to acquire around $4 billion in residential mortgage-backed securities from a company that has given up on mortgage banking.

But first, the Office of the Comptroller of the Currency announced 27 enforcement actions taken against national banks and related individuals between June 16 to Sept. 14.

The actions include a cease and desist order against Union Bank of California N.A.; personal cease and desist orders against seven individuals of LaSalle Bank MidWest N.A. in Troy, Mich.; two removal/prohibition orders; termination of three enforcement actions; and 13 civil money penalty orders against Fare East National Bank in Los Angeles, and Key Bank N.A. in Cleveland, Ohio, among others.

Fitch Ratings announced it is encouraged by Thornburg’s recent efforts toward improving funding through a $575 million convertible preferred stock offering and reducing borrowings under its warehouse financing lines with proceeds from a recent collateralized mortgage obligation transaction. The ratings agency also commended Thornburg for increasing the use of collateralized mortgage debt financing and reducing reliance on reverse repurchase agreement financing.

However, Fitch kept Thornburg’s Issuer Default Rating, securities ratings and Recovery Ratings on review for possible downgrade because of the uncertainty surrounding the secondary mortgage market and the broad negative sentiment for mortgage-related securities.

IndyMac was downgraded to junk status today by Moody’s Investors Service, according to an announcement. Its issuer rating was knocked down to Ba1, reportedly the highest junk grade, from Baa3 due to a decline in the previously-mainly-Alt-A lender’s financials that stems from illiquidity in the mortgage sector.

With the secondary market for Alt-A product essentially shutting down, IndyMac has experienced write-downs of its non-agency held-for-sale inventory and its wholesale channel has suffered a significant decline in capacity, Moody’s explained.

“IndyMac faces a long-term challenge to restore profitability to historical levels while altering its origination channel to a higher weighting of retail and expanding its product mix to reduce reliance on the Alt-A product,” Moody’s said.

Moody’s also lowered subsidiary IndyMac Bank F.S.B.’s bank financial strength rating to D+ from C- with further downgrades possible.

Capstead Mortgage Corp. announced it plans to make a public offering of 8.5 million common stock shares plus an option for underwriters to buy up to an additional 1.3 million shares. The Dallas, Texas-based company expects to use the proceeds to finance purchases of additional adjustable-rate mortgage agency securities and for other purposes.

Bear, Stearns & Co. Inc., Keefe, Bruyette & Woods, Inc. and JMP Securities LLC are acting as joint book-running managers for the offering, and RBC Capital Markets as a co-manager, according to the announcement.

A sale of CIT Group Inc. RMBS to Freddie has led to the exit of one director from Freddie’s board.

CIT, which announced last month its exit from residential lending, will sell to Freddie between $3.5 and $4.2 billion of “AAA-rated” securities backed by approximately $6 billion of residential mortgages. The amount sold will be determined after a rating agency review. The deal is scheduled to close later in the month.

Separately, the New York-based lender reportedly expects to obtain $2 billion through an interim facility by Morgan Stanley Bank, which it will repay when the sale to Freddie settles.

CIT Chairman and Chief Executive Jeffrey M. Peek resigned from Freddie’s board of directors on Monday, citing that he wanted to avoid the appearance of a conflict of interest in connection with the sale, Freddie announced.

“Jeff’s experience and insight have been enormously valuable to Freddie Mac and to the success we have had in building our shareholder value and fulfilling our housing mission,” said Freddie Chairman and CEO Richard F. Syron said in the announcement. “While I am disappointed that he will be leaving our Board, I respect his decision.”


Coco Salazar is an associate editor and staff writer for

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