By Bradley Keoun and Jody Shenn Aug. 19 (Bloomberg) — Flagstar Bancorp Inc. , the Michigan lender whose January takeover sparked scrutiny of buyout firms’ role in the banking industry, may be forced to sell some of its $658 million of mortgage-collection contracts at a loss, people briefed on the matter said. Fannie Mae , which owns or guarantees the mortgages, wants servicing on late or defaulted loans to be handled by specialists, said the people, who declined to be identified because the talks are private. Troy-based Flagstar would keep servicing Fannie Mae loans that remain current. Flagstar, the 10th-biggest U.S. mortgage underwriter, is among several banks under pressure from Fannie Mae to pursue delinquent loans more aggressively, the people said. It’s controlled by MatlinPatterson Global Advisers LLC, which injected $350 million into Flagstar and is trying to shore up the lender’s finances after it posted losses in seven of the past eight quarters . “Large mortgage servicers are just generally overwhelmed,†said Steve Horne , the former director of servicing risk strategy at Fannie Mae who now heads Wingspan Portfolio Advisors LLC , a specialist in distressed-loan collections. They “really lack the tools to cope with the volume of defaults.†Flagstar doesn’t break out the delinquency rate on the loans it services for Fannie Mae, and the amount of servicing contracts that may be divested isn’t settled because talks are still in progress, one of the people briefed on the matter said. Andrew Siegel , a spokesman for MatlinPatterson, referred questions to Flagstar. The bank’s chief financial officer, Paul Borja , didn’t return calls for comment. Brian Faith , a spokesman for Fannie Mae, said he couldn’t comment. Unwanted Headache Last year, GMAC Inc. ’s home-lending unit agreed to sell servicing contracts on $12.7 billion of loans under prodding from Washington-based Fannie Mae. Fannie Mae’s pressure may prove another headache for MatlinPatterson, the New York-based buyout firm founded in 2002 by former Credit Suisse First Boston colleagues David Matlin and Mark Patterson . In May, the Flagstar deal drew criticism from U.S. Senator Jack Reed , a Rhode Island Democrat who sits on the Senate Banking Committee. Since the mortgage crisis began, no other buyout firm has been granted sole control of a bank of that size without first registering as a bank holding company . Flagstar recently hired Carl Levinson , the former head of Citigroup Inc.’s consumer-lending businesses , as a consultant to help analyze mortgage operations, the people briefed on the matter said. Levinson didn’t return calls for comment. ‘Lot More Work’ Fannie Mae and its counterpart, McLean, Virginia-based Freddie Mac were seized by the U.S. government last September and are getting more aggressive in loan-modifications and collections efforts after $47 billion in combined first-half losses. Fannie Mae mortgages 90 days past due have almost tripled in the past year to a record 3.9 percent. As more loans go bad, Fannie Mae and Freddie Mac are concerned banks that service their loans aren’t spending enough on staff and training to get the most from delinquent borrowers, Horne said. In addition to pushing some banks to relinquish servicing, the finance companies are channeling supplemental fees to loan-workout specialists to help banks in dealing with late payers, he said. “Seriously delinquent loans cost you far more money than you’re earning on them because you have to do a lot more work,†said Bose George, an analyst at KBW Inc. in New York who rates Flagstar “market perform.†“It may be neutral to Flagstar to get rid of them, if that’s what Fannie wants, because they’re no longer an income-generating asset.†‘Fair-Market’ Valuation Under U.S. accounting rules , banks are supposed to report the value of their collections contracts — known as mortgage- servicing rights, or MSRs — on a “fair market†basis, or roughly what they would fetch in a sale. A bank must record a loss whenever it sells MSRs for a price below where they’re marked on the books. As of June 30, Flagstar handled servicing on about $60.5 billion of loans for government-sponsored agencies, according to the bank’s second-quarter earnings report . Its MSRs were valued at $658.2 million. That’s almost twice the bank’s market valuation of $342 million as of Aug. 17. The market for MSRs is so “illiquid†that Flagstar bases their valuation on internal estimates, according to the report. The process incorporates projections of loan-prepayment rates, interest rates, servicing costs and “other economic factors.†Lower Margins Eyed Flagstar warned of the potential for MSR impairment. Government agencies “have developed a number of programs and instituted a number of requirements on servicers in an effort to limit foreclosures ,†the bank said in the second- quarter report, published earlier this month. Such programs “may result in lower margins or an impairment in the expected value of our mortgage-servicing rights.†Flagstar may already have written down its MSRs tied to delinquent loans, helping to minimize whatever loss must be realized in a sale, George said. MatlinPatterson owns about 80 percent of the voting interest in Flagstar. The bank’s publicly traded shares rose 4 cents to 77 cents in New York Stock Exchange composite trading yesterday, leaving them just below the 80-cent mark where MatlinPatterson obtained its shares in a preferred-stock conversion. To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net ; Jody Shen in New York at jshenn@bloomberg.net .
