UBS AG said it would lay off 1,500 workers and predicted third-quarter losses will exceed $500 million after deteriorating conditions in the U.S. subprime mortgage market forced the Swiss-based bank to write down the value of billions in investments.
In other news related to problems in mortgage lending:
- Analysts at Fitch Ratings said they placed the corporate debt of Indymac Bancorp and residential servicer ratings of Indymac Bank on "Rating Watch Negative" for possible downgrade.
- A trade group said there were 58,441 defaults on home loans with private mortgage insurance in August, up 30 percent from the same month a year ago.
- Washington Mutual announced new procedures for working with mortgage brokers.
Pretax losses in UBS’s Investment Bank division are expected to total between 600 million and 800 million Swiss francs — or more than $680 million U.S. dollars, said UBS Group Chief Executive Officer Marcel Rohner in a press release.
Rohner said losses in the Investment Bank — mainly write-downs of securities related to subprime mortgage-backed securities (MBS) — were on the order of 4 billion francs, or $3.4 billion in U.S. dollars. The write-downs included "legacy positions" of UBS’ defunct hedge fund, Dillon Read Capital Management.
Deterioration in the U.S. subprime residential mortgage-backed securities market, especially in August, UBS said, "was more sudden and more severe than in recent history, and markets became illiquid. This led to substantial valuation losses, including in securities with high credit ratings."
UBS said it has valued its remaining subprime holdings using models that take "a cautious view of future developments in the U.S. mortgage market."
The bank’s remaining positions in direct subprime MBS are valued at $19 billion, consisting "overwhelmingly" of AAA-rated tranches. UBS said it also had around $4 billion of exposure to subprime securities through warehouse lines of credit and retained collateralized debt obligations (CDOs).
Rohner called the bank’s first quarterly loss in nine years "an unsatisfactory result," and said he would take over as interim CEO of the Investment Bank, replacing Huw Jenkins. The move was one of several upper-management changes at UBS Investment Bank and UBS Group, including the retirement of Group Chief Financial Officer Clive Standish and the appointment of Joseph Scoby to Group chief risk officer.
Scoby’s first task as a member of the Group executive board "will be to review and refine our risk processes," UBS said.
The company said it remains healthy overall and expects profits for the first nine months of the year to total 10 billion francs, or $8.6 billion. UBS will report third-quarter results at the end of the month.
On Friday, federal regulators closed Web-based NetBank, saying it had failed to recover from significant mortgage lending losses in 2006.
At Indymac, servicing operations "continue to perform at a level consistent with the prior year," Fitch analysts said, with the appropriate staff, procedures and controls in place to "adequately manage its servicing portfolio and initiatives." Fitch said Indymac was servicing more than 617,000 loans totaling nearly $156 billion as of May 31, a 45 percent increase from the year before.
But Fitch analysts said Indymac Bancorp’s BBB- corporate rating was placed on Rating Watch Negative on Sept. 26 for possible downgrade in part because of "the unprecedented disruption of the secondary mortgage market, an investor base the company has traditionally relied on to buy a majority of its mortgage production."
A company’s financial condition is an important component of servicer rating analysis, Fitch analysts said the next day in announcing a possible downgrade on Indymac Bank’s servicer ratings for prime, alt-A and subprime loans.
In responding to recent decisions by Moody’s Investor Service to lower its ratings on Indymac Bancorp and Indymac Bank, Indymac said the company’s liquidity continues to be "very strong," as it is conducting all of its business through Indymac Bank.
"These ratings only come into play if we are in the market for new long-term debt financing, and this is not currently the case," Indymac spokesman Grove Nichols told investors on the company’s official blog.
Like some other lenders, Indymac is now concentrating on loans eligible for repurchase by government-sponsored mortgage repurchasers Fannie Mae and Freddie Mac. The company is in the process of cutting about 10 percent of its workforce, or 1,000 employees, and expects to post about $38 million in third-quarter losses.
According to Fitch analysts, the company operates loan servicing centers in Pasadena, Calif., Kalamazoo, Mich., and Austin, Texas, and outsources new loan set-up, back-office escrow functions, and collection calls for newly delinquent accounts to a vendor in Puna, India.
During the year, Indymac moved its default servicing operations from Pasadena to Austin, and continued to make operational and technological improvements to increase its operating controls and efficiencies, Fitch said. Indymac has developed "proactive borrower contact strategies" for pay-option adjustable-rate mortgages, and implemented scripting automation to eliminate manual escrow analysis.
Indymac’s residential servicer rating in four categories is "2+" on a scale of one to five, with one being the highest rating.
In Washington, D.C., the Mortgage Insurance Companies of America reported that 197,169 borrowers used private mortgage insurance (PMI) to buy or refinance a home in August, up 15.2 percent from the previous month.
MICA members reported 33,811 cures and 58,441 defaults during August — a ratio of 57.9 percent. That’s an improvement over the 53.4 percent ratio posted in July, but significantly lower than the 74.4 percent ratio a year ago.
Reporting companies included AIG United Guaranty, Genworth Mortgage Insurance Corp., Mortgage Guaranty Insurance Corp., PMI Mortgage Insurance Co., Republic Mortgage Insurance Co. and Triad Guaranty Insurance Corp.
Also, Washington Mutual says it is implementing new procedures for working with mortgage brokers that will require brokers to prove they have disclosed key loan terms to borrowers, including the broker’s commission on the deal.
WaMu said the bank will also attempt to call every borrower whose loan is originated by a mortgage broker before closing in order to review key loan terms with the customer.
Under the bank’s new standards for mortgage brokers, WaMu will require proof that the broker has disclosed the loan amount, loan term, whether interest rate and mortgage payments may change, and whether the loan includes a prepayment penalty.
Brokers will also be required to disclose the amount of all compensation borrowers pay to brokers, including broker points, administrative or processing fees, and yield spread premiums.
WaMu had previously eliminated subprime stated-income loans and subprime 2/28 and 3/27 loans — adjustable-rate mortgages (ARMs) with initial fixed-rate terms of less than five years, and requires tax and insurance escrow accounts with all new subprime loans WaMu originates.