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Major Mortgage Sector Shakeups

Major Mortgage Sector Shakeups

Recent mergers, acquisition and corporate activity

November 20, 2007


photo of Coco Salazar
Freddie Mac is in need of more capital while Countrywide Financial Corp. says it is liquid. And problems at Option One Mortgage Corp., which could soon be shut down, led to yet another executive casualty.

Freddie announced today several actions to help shore up capital in response to a $2 billion third quarter loss. It has retained Goldman Sachs and Lehman Brothers as financial advisors to help with near term capital requirements and may cut its fourth quarter dividend in half.

“If these measures are not sufficient to help the company manage to the 30 percent mandatory target capital surplus, then the company may consider additional measures in the future such as limiting growth or reducing the size of our retained portfolio, slowing purchases into our credit guarantee portfolio, issuing additional preferred or convertible preferred stock and issuing common stock,” Freddie stated.

In response to bankruptcy rumors, Countrywide issued a statement today indicating it has more than enough liquidity and capital.

“The company disclosed that it had $35.4 billion in highly reliable liquidity available at Oct. 31, 2007, up from $33.6 billion available at September [30], 2007,” the Calabasas, Calif.-based company said. “It is noteworthy that Moody’s Investors Services yesterday confirmed Countrywide’s investment grade credit ratings.”

Mark A. Ernst has resigned as chairman, president and chief executive officer of H&R Block Inc., the parent of Option One announced. Richard C. Breeden, a former U.S. Securities and Exchange Commission chairman, was appointed as non-executive chairman while Alan M. Bennett was named interim CEO.

The moves follows downgrade warnings on Block’s senior debt and short-term ratings from Moody’s Investors Service, which said continued poor performance at the subprime subsidiary have reduced the financial flexibility of Block and may compromise the potential sale of the unit to Cerberus Capital Management.

Last month, Option One saw its warehouse line capacity cut from $6.5 billion to $0.9 billion. In August, Block reported it was trying to negotiate a modification to the sale of Option One to Cerberus Capital Management L.P. that included just selling the servicing operation. “H&R Block would be responsible for divesting or winding down Option One’s remaining origination business, which would be pursued immediately,” Block said at the time.

Ernst’s departure is only the latest in a wave that has seen the ouster Merrill Lynch & Co.’s chairman and CEO and the resignation of Citigroup’s chairman and CEO.

The Federal Deposit Insurance Corp. and the Office of the Commissioner of Financial Institutions of Puerto Rico terminated two orders of cease and desist against FirstBank Puerto Rico after a recent Safety and Soundness examination of the bank found fulfillment of requirements of both orders, parent First BanCorp announced today.

One of the orders, which was issued Aug. 24, 2006, was lifted as a result of refined core elements and other procedures to ensure compliance with the Bank Secrecy Act. The March 16, 2006, order was terminated due to FirstBank taking required actions, including a substantial reduction to acceptable levels of credit risk concentration in certain loans outstanding to two large Puerto Rican originators, as well as a comprehensive review and loss reserve analysis of its mortgage portfolio, which amounted to $3.0 billion as of the third quarter’s end, with 12 percent of its loans in Florida and more than 90 percent consisting of fixed, rate, fully amortizing, full documentation loans, First BanCorp said.

Marshall & Ilsley Corp. announced it is reviewing its credit relationship with Franklin Credit Management Corp., which last week halted operations and disclosed deterioration in its mortgage portfolio that caused Huntington Bancshares to anticipate a net loss. As of Oct. 31, 2007, Marshall’s credit exposure to Franklin and subsidiary, Tribeca Lending Corp, was $282 million, all loans were current and performing and were secured by pools of first and second priority residential mortgages. Most underlying pools are performing within originally projected loss expectations, and losses embedded in $123 million in pools of loans to Franklin originated after 2005 are not expected to be material to Marshall’s financial results.

“We have been in ongoing discussions with Franklin management, and we continue to monitor this credit closely,” Marshall said in the announcement. “As is consistent with our traditional credit discipline, we will evaluate known and probable loss exposures in this and our other consumer portfolios and will take actions as prudent and necessary.”

A.M. Best Co. announced it placed under review with negative implications Swiss Reinsurance Co.’s financial strength rating of A+, which is “Superior,” issuer credit ratings of aa, as well as all debt it has issued or guaranteed. A.M. indicated the rating actions were due to Swiss Re’s disclosure of a pretax $1.1 billion mark-to-market loss resulting from unprecedented ratings downgrades in October and lack of liquid markets for underlying securities of two credit default swaps written by its Credit Solutions unit.

Oxford Funding announced it secured a banking commitment to purchase a $2.4 million mortgage portfolio. The Houston, Texas-based company indicated it is acquiring the performing loans at a discount, with the intention of reselling them at a profit, and that it sees more highly profitable opportunities on the horizon as the mortgage market meltdown continues.

“At a time when other major mortgage companies have announced that they are no longer able to obtain credit Oxford Funding is capitalizing on the opportunity to acquire another portfolio of performing loans,” Oxford President Robert Dunn said in the written statement. “When you have the capability to buy quality mortgages, backed with 1st liens on real estate, at a steep discount to their value you have an attractive platform to generate significant profits.”

BNY Mortgage Company LLC announced it will operate under the name of EverBank Reverse Mortgage LLC, parent EverBank announced. BNY was acquired in March. EverBank Reverse Mortgage has also moved its headquarters to Bloomfield, N.J.

Florida-based Real Mortgage Systems Inc. confirmed, in an e-mail to, that it acquired Flatirons Financial Inc. Real Mortgage says its mission is to be “the definitive one-stop shop for a Property Investor’s Acquisition & Improvement Lending needs.” Flatirons, according to its Web site, is a residential and commercial mortgage banker based in Olathe, Kan.


Coco Salazar is an associate editor and staff writer for

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