Commentary: Scratch-and-Dent Musings

What a tangled web we weave: For those who missed it, mortgage insurer MGIC Investment Corp. reported this past week that its first quarter profits fell 43.4 percent. Net income fell to $92.4 million, or $1.12 per share, from $163.5 million, or $1.87 per share, in the year-ago period. The company said it was hurt by the housing market, higher losses and flat net premiums, which begs the question of what impact its pending merger with Radian Group Inc. will have on the soon-to-be combined entity. Beyond their insurance premium line of business, MGIC/Radian have a controlling interest in Credit-Based Asset Servicing and Securitization LLC, one of the nation’s largest scratch-and-dent mortgage operations — most of which are subprime. C-BASS, in turn, owns Litton Loan Servicing, one of the largest subprime servicers in the nation. So Litton services the loans purchased by C-BASS — most of which are troubled and can therefore be had for a song — and hopefully gets them reperforming, insured by MGIC and then re-securitized by various SPEs associated with C-BASS.

It’s a business model that minted money for C-BASS, MGIC and Radian during the subprime boom, what with the secondary market’s seemingly insatiable appetite for subprime products — even scratch-and-dent was seen as a quantifiable (and therefore saleable) risk. But how profitable is the model now? We have no idea, because C-BASS operations — and in particular servicing data on Litton — is buried in MGIC/Radian’s consolidated financials. That’s part of the beauty of the C-BASS setup: free to operate publicly, but also free from public scrutiny. The recent decision by C-BASS to purchase Fieldstone Investment Corp. suggests that the company expects its ability to purchase paper will be limited going forward, and that it may begin focusing more of its efforts on the origination end of the mortgage banking cycle. (After all, loss mitigation in the current mortgage market isn’t exactly the cake-baking contest it once was.) Deutsche Bank, trimming the fat: db home Lending LLC, the capitalization-challenged subsidiary of Deutsche Bank AG and formerly known as Chapel Funding, let go of 1/3 of its work force in the past week, according to numerous sources. The company has not confirmed the move publicly yet, but we have to wonder how its db home operations fit in with its recent acquisition of MortgageIT, or if the layoffs at db home signal a larger strategy at Deutsche Bank to reduce its residential mortgage workforce in the face of a ongoing downturn in the market. Is it possible that DB is less-than-enthralled with its acquisition of the origination platform formerly known as Chapel? More than student loan troubles: International financial solutions provider CIT, currently embroiled in a student loan kickback scandal, also allegedly is making dramatic steps to lessen its exposure to the mortgage market. Sources suggest to HW that the company, which provides wholesale lending services to brokers through its BrokerEdge division, abruptly closed one its Cleveland loan centers located in Independence, Ohio. An unknown number of employees at the location were allegedly let go, although the company has not yet responded to our requests for information about or confirmation of the move. If you’ve got something we should know about, as always, let me know: [email protected]. Our eyes and ears are open.

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