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Private-Label Securitization Activity

12 Months Ended

Dec. 31, 2011

Private-Label Securitization Activity [Abstract]

Note 11 — Private-label Securitization Activity

The Company previously securitized fixed and adjustable rate second mortgage loans and home equity line of credit (“HELOC”) loans. The Company acted as the principal underwriter of the beneficial interests that were sold to investors. The financial assets were derecognized when they were transferred to the securitization trust, which then issued and sold mortgage-backed securities to third party investors. The Company relinquished control over the loans at the time the financial assets were transferred to the securitization trust. The Company recognized a gain on the sale on the transferred assets.

The Company’s retained interests in the securitized mortgage loans and trusts, generally consist of residual interests, transferor’s interests, and servicing assets. The residual interests represent the present value of future cash flows expected to be received by the Company. Residual interests are accounted for at fair value and are included as “securities classified as trading” in the Consolidated Statements of Financial Condition. Any gains or losses realized on the sale of such securities and any subsequent changes in unrealized gains and losses are reported in the Consolidated Statements of Operations.

The Company recorded $26.1 million in residual interests as of December 31, 2005, as a result of its non-agency securitization of $600 million in home equity line of credit loans (the “FSTAR 2005-1 HELOC Securitization”).

On April 28, 2006, the Company completed a guaranteed mortgage securitization transaction of approximately $400.0 million of fixed second mortgage loans (the “FSTAR 2006-1 Second Mortgage Securitization”) that the Company held at the time in its investment portfolio. The transaction was treated as a recharacterization of loans held-for-investment to mortgage-backed securities held to maturity and, therefore, no gain on sale was recorded. As of December 31, 2011, the Company still holds this guaranteed mortgage securitization in its available for sale investment securities.

The Company recorded $11.2 million in residual interests as of December 31, 2006, as a result of its non-agency securitization of $302 million in home equity line of credit loans (the “FSTAR 2006-2 HELOC Securitization”).

On March 15, 2007, the Company sold $620.9 million in closed-ended, fixed and adjustable rate second mortgage loans (the “FSTAR 2007-1 Second Mortgage Securitization”) and recorded $22.6 million in residual interests and servicing assets as a result of the non-agency securitization. On June 30, 2007, the Company completed a secondary closing for $98.2 million and recorded an additional $4.2 million in residual interests.

The Company has not engaged in any private-label securitization activity since 2007.

At December 31, 2011, the Company’s residual interests were deemed to have no value. Transferor’s interests represent draws on the HELOCs subsequent to them being sold to the trusts that were funded by the Bank rather than being purchased by the trusts. Transferor’s interests are included in “loans held-for-investment” in the Consolidated Statements of Financial Condition. At December 31, 2011, the Company no longer serviced any of the loans that were sold to the private-label securitization trusts, and therefore had no servicing assets accounted for on an amortized cost method.

Summary of Securitization Activity

Certain cash flows received from the securitization trusts were as follows:


	December 31,
	2011		2010		2009

	(Dollars in thousands)
Servicing fees received	$	—	$	2,998	$	5,376
Loan repurchases from representations and warranties		—		—		30

The following table sets forth certain characteristics of each of the securitizations at their inception and the current characteristics as of and for the year ended December 31, 2011.


	2005-1 at Inception			2005-1 Current Levels			2006-2 at Inception			2006-2 Current Levels
	(Dollars in thousands)
HELOC Securitization
Number of loans		8,155			2,575			4,186			1,993
Aggregate principal balance	$	600,000		$	117,487		$	302,182		$	119,937
Average principal balance	$	55		$	46		$	72		$	60
Weighted average fully indexed interest rate		8.43	%		5.75	%		9.43	%		6.51	%
Weighted average original term		120 months			120 months			120 months			120 months
Weighted average remaining term		112 months			42 months			112 months			56 months
Weighted average original credit score		722			718			715			720

Transferor’s Interests

Under the terms of the HELOC securitizations, the trusts have purchased and were initially obligated to pay for any subsequent additional draws on the lines of credit transferred to the trusts. Upon entering a rapid amortization period, the Company becomes obligated to fund the purchase of those additional balances as they arise in exchange for a beneficial interest in the trust (transferor’s interest). The Company must continue to fund the required purchase of additional draws by the trust as long as the securitization remains active. The table below identifies the draw contributions for each of the HELOC securitization trusts as well as the fair value of the transferor’s interests.


	At December 31,
Summary of Transferor’s Interest by Securitization	2011						2010
Summary of Transferor’s Interest by Securitization	FSTAR 2005-1			FSTAR 2006-2			FSTAR 2005-1			FSTAR 2006-2
	(Dollars in thousands)
Total draw contribution	$	35,430		$	51,265		$	35,088		$	50,949
Additional balance increase amount(1)	$	26,567		$	29,964		$	28,219		$	33,407
Transferor’s interest ownership percentage		22.18	%		24.49	%		19.59	%		21.75	%
Fair value of transferor’s interests	$	9,594		$	—		$	17,439		$	—
Transferor’s interest reserve	$	309		$	643		$	1,876		$	1,908

(1)	Additional draws on lines of credit for which the Company receives a beneficial interest in the Trust.

FSTAR 2005-1. At December 31, 2011 and 2010, outstanding claims due to the note insurer were $14.4 million and $10.8 million, respectively, and based on the Company’s internal model, the Company believed that because of the claims due to the note insurer and continuing credit losses on the loans underlying the securitization, the fair value/carrying amount of the transferor’s interest was $9.6 million and $17.4 million, respectively. Also, during the third quarter of 2010, the Company determined that the transferor’s interests had deteriorated to the extent that a contingent liability was required to be recorded. The Company recorded a liability to reflect the expected liability arising from losses on future draws associated with this securitization, of which $0.3 million remained at December 31, 2011. In determining this liability, the Company assumed (i) no further draws would be made with respect to those HELOCs as to which further draws were currently prohibited, (ii) the remaining HELOCs would continue to operate in the same manner as their historical draw behavior indicated, as measured on an individual loan basis and on a pool drawdown basis, and (iii) that any draws actually made and therefore recognized as transferor’s interests by the Company would have a loss rate of 64.0 percent.

There are two distinct components to the assumptions underlying the loss rate on the transferor’s interests. First, the structure of the securitization provides for losses in the transaction to be shared pari passu, i.e., equally, among the parties rather than being borne solely or primarily by the Company. Second, to the extent that underlying claims to the insurer increased concurrently with credit losses, the reimbursement owed to the insurer from the cash payout structure (i.e., the waterfall) in the securitization also increased. During the third quarter of 2010, the combination of the excess spread, which is the difference between the coupon rate of the underlying loans less the note rate paid to the bondholders, and the transferor’s interests were insufficient to support the repayment of the insurer’s claims, and the assumed loss rate increased to 35.2 percent giving rise to recording of the related liability at that time.

In order to estimate losses on future draws and the timing of such losses, a forecast for the draw reserve was established. The forecast was used as the basis for recording the liability. Historical observations and draw behavior formed the basis for establishing the key assumptions and forecasted draw reserve.

First, the forecast assumed a 64.0 percent loss on all future draws. Second, the forecast projected future obligations on a monthly basis using twelve-month rolling average of the actual draws as a percentage of the unfunded balance. For example, for the period ended December 31, 2011, the twelve-month rolling average draw rate was 0.6 percent of the unfunded commitments (i.e., those still active). This percentage was computed by dividing (i) the actual draw rate over the twelve month period ending on that date, by (ii) the balance of the unfunded commitments still active on that date. The draw rate was then used to project monthly draws through the remaining expected life of the securitization. In doing so, the 0.6 percent draw rate (as noted above) was applied against the expected declining level of unfunded commitments in future months caused by payoffs, credit terminations and line cancellations. This rate of decline was based on historical experience within the securitization pool of loans.

These calculations of future monthly draws comprise, in the aggregate, the total dollar amount of expected future draws from the securitization pool. Despite a significant reduction in the unfunded commitments, the Company has not observed a similar reduction in the actual draw rate. Even with a constant draw rate, such total dollar amount declines to the extent the level of unfunded commitments that are still active declines, as is the case in the forecast. Because the expected loss on future draws on December 31, 2011 was 64.0 percent, the expected future draws equaled the potential future draw liability at that date.

As indicated above, the forecast uses a constant draw rate as a percentage of the current unfunded commitment that is based on historical observations and draw behavior. The forecast does not contemplate current inactive accounts becoming active and thereby becoming eligible for draw because the nature of the loans that do not currently generate transferor’s interests have characteristics that suggest an extremely low likelihood of doing so in the future. Such loans are those in which the draw feature has been discontinued pursuant to the terms of the underlying loan agreement due to a credit-related deficiency of the borrower or due to a decline in the value of the related residential property serving as collateral.

The forecast also reflects the low or zero draw rates of certain of the unfunded commitments that are still active (i.e., $3.8 million and $6.4 million for FSTAR 2005-1 HELOC Securitization. at December 31, 2011 and 2010, respectively). For instance, some loans are still active but have never been drawn upon, suggesting that the loan may have been acquired at the time of a related first mortgage origination solely for contingency purposes but without any actual intent to draw. Similarly, another group of active loans were fully drawn upon at the time of the related first mortgage origination and have been paid down over time, suggesting that the borrower intended the HELOC to serve more as a second mortgage rather than as a revolving line of credit.

FSTAR 2006-2. At December 31, 2011 and 2010, outstanding claims due to the note insurer were $82.7 million and $71.2 million, respectively, and based on the Company’s internal model, the Company believed that because of the claims due to the note insurer and continuing credit losses on the loans underlying the securitization, there was no carrying amount of the transferor’s interest. Also, during the fourth quarter 2009, the Company determined that the transferor’s interests had deteriorated to the extent that a SFAS 5 (now codified within ASC Topic 450, “Contingencies,”) liability was required to be recorded. The Company recorded a liability of $7.6 million to reflect the expected liability arising from losses on future draws associated with this securitization, of which $0.6 million remained at December 31, 2011. In determining this liability, the Company (i) assumed no further draws would be made with respect to those HELOCs as to which further draws were currently prohibited, (ii) the remaining HELOCs would continue to operate in the same manner as their historical draw behavior indicated, as measured on an individual loan basis and on a pool drawdown basis, and (iii) that any draws actually made and therefore recognized as transferor’s interests by the Company would have a loss rate of 100 percent.

There are two distinct components to the assumptions underlying the loss rate on the transferor’s interests. First, the structure of the securitization provided for losses in the transaction to be shared pari passu, i.e., equally, among the parties rather than being borne solely or primarily by the Company. Second, to the extent that underlying claims to the insurer increased concurrently with credit losses, the reimbursement owed to the insurer from the waterfall also increased. During the fourth quarter 2009, the excess spread, the difference between the coupon rate of the underlying loans less the note rate paid to the bondholders and the transferor’s interests were insufficient to support the repayment of the insurer’s claims, and the assumed loss rate increased to 100 percent, giving rise to recording of the related liability at that time.

First, the forecast assumed a 100 percent loss on all future draws. Second, the forecast projected future obligations on a monthly basis using a three-month rolling average of the actual draws as a percentage of the unfunded balance. For example, for the period ended December 31, 2011, the three- month rolling average draw rate was 1.04 percent of the unfunded commitments (still active). This percentage was computed by dividing (i) the actual draw rate over the three month period ending on that date, by (ii) the balance of the unfunded commitments still active on that date. The draw rate was then used to project monthly draws through the remaining expected life of the securitization. In doing so, the 1.04 percent draw rate (as noted above) was applied against the expected declining level of unfunded commitments in future months caused by payoffs, credit terminations and line cancellations. This rate of decline was based on historical experience within the securitization pool of loans.

These calculations of future monthly draws comprise, in the aggregate, the total dollar amount of expected future draws from the securitization pool. Despite a significant reduction in the unfunded commitments, the Company has not observed a similar reduction in the actual draw rate. Even with a constant draw rate, such total dollar amount declines to the extent the level of unfunded commitments that are still active declines, as is the case in the Company’s forecast. Because the expected loss on future draws in December 2011 was 100 percent, the expected future draws equaled the potential future draw liability at that date.

The forecast also reflects the low or zero draw rates of certain of the unfunded commitments that are still active (i.e., $1.6 million and $3.1 million for FSTAR 2006-2 at December 31, 2011 and 2010, respectively). For instance, some loans are still active but have never been drawn upon, suggesting that the loan may have been acquired at the time of a related first mortgage origination solely for contingency purposes but without any actual intent to draw. Similarly, another group of active loans were fully drawn upon at the time of the related first mortgage origination and have been paid down over time, suggesting that the borrower intended the HELOC to serve more as a second mortgage rather than as a revolving line of credit.

The following table outlines the Company’s expected losses on future draws on loans in FSTAR 2005-1 HELOC Securitization and FSTAR 2006-2 HELOC Securitization at December 31, 2011.


	Unfunded Commitments(1)		Expected Future Draws as % of Unfunded Commitments(2)			Expected Future Draws(3)		Expected Loss(4)			Potential Future Liability(5)
	(Dollars in thousands)
FSTAR 2005-1 HELOC Securitization	$	3,773		12.0	%	$	454		64.0	%	$	291
FSTAR 2006-2 HELOC Securitization		1,590		17.9	%		284		100.0	%		284

Total	$	5,363				$	738				$	575

(1)	Unfunded commitments represent the amounts currently fundable at the dates indicated because the underlying borrowers’ lines of credit are still active.

(2)	Expected future draws on unfunded commitments represents the historical draw rate within the securitization.

(3)	Expected future draws reflects unfunded commitments multiplied by expected future draws percentage.

(4)	Expected losses represent an estimated reduction in carrying value of future draws.

(5)	Potential future liability reflects expected future draws multiplied by expected losses.

The table below sets forth key assumptions and the hypothetical sensitivity of the value of the transferor’s interest and the related liability to an immediate adverse change in key assumptions for both the HELOC securitizations FSTAR 2005-1 and FSTAR 2006-2. Changes in value based on 10 percent and 20 percent variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in value may not be linear. In practice, changes in one factor may result in changes in other factors, such as increases in market interest rates that may magnify or counteract sensitivities.


	Fair Value		Prepayment Speed			Cumulative Loss Rate			Annual Discount Rate			Change In Valuation
FSTAR 2005-1
Transferor’s interest valuation as of December 31, 2011	$	9,594		9.0	%		13.8	%		5.8	%	$	—
10 percent adverse change in assumption	$	8,061		9.9	%		14.0	%		6.3	%	$	(1,533	)
20 percent adverse change in assumption	$	6,605		10.8	%		14.2	%		6.9	%	$	(2,988	)

	Fair Value		Loss Rate			Projected Draw Rate			Projected Unfunded Decline			Change In Reserve
FSTAR 2005-1
Transferor’s interest liability as of December 31, 2011	$	454		64.0	%		0.59	%		(4.21	)%	$	—
10 percent adverse change in assumption	$	538		67.6	%		0.65	%		(3.79	)%	$	73
20 percent adverse change in assumption	$	631		71.2	%		0.71	%		(3.37	)%	$	158
FSTAR 2006-2
Transferor’s interest liability as of December 31, 2011	$	284		100.0	%		1.04	%		(5.67	)%	$	—
10 percent adverse change in assumption	$	344		100.0	%		1.14	%		(5.10	)%	$	59
20 percent adverse change in assumption	$	416		100.0	%		1.25	%		(4.54	)%	$	132

Assured Litigation

In 2009 and 2010, the Bank received repurchase demands from Assured Guaranty Municipal Corp., formerly known as Financial Security Assurance Inc. (“Assured”), with respect to HELOCs that were sold by the Bank in connection with the HELOC securitizations. Assured is the note insurer for each of the two HELOC securitizations completed by the Bank. The Bank provided detailed rebuttals to these demands. In April 2011, Assured filed a lawsuit against the Company, alleging a breach of various loan-level representations and warranties and seeking relief for breach of contract, as well as full indemnification and reimbursement of amounts that it had paid under the respective insurance policy (which amounts were estimated by Assured to be in excess of $80 million), plus interest and costs. In May 2011, the Company filed a motion with the court to dismiss the lawsuit, asserting Assured was limited to the sole remedy of transferring deficiency amounts to the related securitization trust under the terms of the agreements, and that with regard to charged off loans, the deficiency amount is defined to be zero. On July 7, 2011, the court issued its order on the motion, dismissing Assured’s claims for indemnification and reimbursement, but allowing the case to proceed on the breach of contract claims. However, the court further limited Assured’s breach of contract claims to those related to enforcing the Company’s “cure or repurchase” obligations.

Unfunded Commitments

The table below identifies separately for each HELOC trust: (i) the notional amount of the unfunded commitment under the Company’s contractual arrangements, (ii) unfunded commitments that have been frozen or suspended because the borrowers do not currently meet the contractual requirements under their home equity line of credit with the Company, and (iii) the amount currently fundable because the underlying borrowers’ lines of credit are still active.


	FSTAR 2005-1		FSTAR 2006-2		Total
	(Dollars in thousands)
At December 31, 2011
Notional amount of unfunded commitments(1)	$	33,226	$	31,257	$	64,483
Frozen or suspended unfunded commitments	$	29,454	$	29,667	$	59,121
Unfunded commitments still active	$	3,773	$	1,590	$	5,363
At December 31, 2010
Notional amount of unfunded commitments(1)	$	40,251	$	35,284	$	75,535
Frozen or suspended unfunded commitments	$	33,885	$	32,227	$	66,112
Unfunded commitments still active	$	6,366	$	3,057	$	9,423

(1)

The Company’s total potential funding obligation is dependent on both (a) borrower behavior (e.g., the amount of additional draws requested) and (b) the contractual draw period (remaining term) available to the borrowers. Because borrowers can make principal payments and restore the amounts available for draws and then borrow additional amounts as long as their lines of credit remain active, the funding obligation has no specific limitation and it is not possible to define the maximum funding obligation. However, the Company expects that the call provision of the FSTAR 2005-1 securitization and the FSTAR 2006-2 securitization pools will be reached in 2015 and 2014, respectively and the exposure will be substantially mitigated such times, based on prepayment speeds and losses in cash flow forecast.

Credit Risk on Securitization.

With respect to the issuance of private-label securitizations, the Company retains certain limited credit exposure in that it retains non-investment grade residual securities in addition to customary representations and warranties. The Company does not have credit exposure associated with non-performing loans in securitizations beyond its investment in retained interests in non-investment grade residuals and draws (transferor’s interests) on HELOCs that it funds and which are not reimbursed by the respective trust. The value of the Company’s transferor’s interests reflects the Company’s credit loss assumptions as to the underlying collateral pool. To the extent that actual credit losses exceed the assumptions, the value of the Company’s non-investment grade residual securities and unreimbursed draws will be diminished.

The following table summarizes the Company’s consumer servicing portfolio and the balance of retained assets with credit exposure, which includes residential interests that are included as trading securities and unreimbursed HELOC draws that are included in loans held-for-investment.


	At December 31,
	2011				2010
	Amount of Loans Serviced		Balance of Retained Assets With Credit Exposure		Amount of Loans Serviced		Balance of Retained Assets With Credit Exposure
	(Dollars in thousands)
Private-label securitizations	$	—	$	9,594	$	—	$	17,439

Mortgage loans that have been securitized in private-label securitizations that are serviced by the Company, (as of December 31, 2010, all servicing related to these loans had been transferred to a third party servicer), and are sixty days or more past due, all of which are consumer loans and related credit losses incurred in the securitization trusts as of December 31, 2011 and 2010, are presented below:


	Total Principal Amount of Loans Outstanding				Principal Amount of Loans 60 Days or More Past Due				Credit Losses (Net of Recoveries)
	Total Principal Amount of Loans Outstanding				Principal Amount of Loans 60 Days or More Past Due				For the Years Ended December 31,
	December 31,				December 31,				For the Years Ended December 31,
	2011		2010		2011		2010		2011		2010		2009
	(Dollars in thousands)
Securitized mortgage loans	$	—	$	—	$	—	$	—	$	—	$	98,657	$	140,656