Subprime Mortgages

Fitch Ratings has downgraded 119 bonds in 85 residential mortgage-backed securities transactions to 'D,' saying the securities have suffered writedowns on the underlying principal. All the bonds affected previously had had 'C' ratings that indicated a default was expected. Eighty of the bonds downgraded were from subprime credit deals and 33 of the bonds downgraded were from alternative-A credit deals. The remaining six bonds were from miscellaneous other RMBS transaction types, according to Fitch.

U.S. subprime residential mortgage-backed securities from 2004 are seeing notable deterioration in performance while other recent vintages continue to show signs of stabilization, according to Fitch Solutions indices. "As the good quality loans are refinanced, the remaining pools are on average of lower credit quality, a factor that largely caused the drop in price for the 2004 Subprime Price Index," said Fitch Solutions managing director Thomas Aubrey in a report based on the company's credit default swaps of RMBS indices. "Credit quality among the pools will continue to converge over time as better quality borrowers take advantage of refinancing opportunities, thus leaving the pool with more consistent weaker borrowers." The 2004 vintage Subprime RMBS Price Index dropped by 16.7% to 11.57 in the latest month from 13.91 in the previous month, while the Fitch Total Market Subprime RMBS Price Index dropped more marginally to 8.02 from 8.40 and vintages from 2005 through 2007 experienced slight increases during the same time period. While refinancing affected the 2004 vintage, 2005-2007 vintages were less affected because their loan-to-value ratios precluded refis in many cases, according to Fitch Solutions.

Senate Banking Committee chairman Christopher Dodd, D-Conn., has produced a "discussion draft" of a comprehensive regulatory reform bill that requires sellers of mortgage-backed securities to retain 10% of the credit risk. However, the draft provides a risk retention exemption for government-guaranteed mortgages as well as mortgages purchased and securitized by Fannie Mae and Freddie Mac. In addition, regulators can approve a "total or partial" risk retention exemption for other MBS and allocate risk retention between securitizers and the lenders. The House Financial Services Committee is moving toward approving a similar bill to address systemic risk that also requires 10% risk retention, a mandate that the mortgage industry opposes. "To restore confidence in our markets and encourage investment, we will require companies that sell products such as mortgage-backed securities to keep 'skin in the game' so that they won't sell worthless securities to investors," Sen. Dodd said. His bill also creates an independent Consumer Financial Protection Agency to protect consumers from "hidden fees and abusive terms" so they know they are being offered "safe" mortgages and other products, he said. Sen. Dodd said he would seek input on his draft bill and reach out to Republicans in an attempt to mark up and approve a bill by the first week of December. Dodd's CFPA plan focuses on companies that "pose the greatest risk to consumers — mortgage bankers, brokers, finance companies and the largest institutions," according to a legislative summary.

Two former managers in charge of Bear Stearns hedge funds that invested in subprime bonds and derivatives were found not guilty of fraud charges Tuesday afternoon in New York. A jury in Federal District Court in Brooklyn acquitted former Bear executives Ralph Cioffi and Matthew Tannin, believing the two men did not lie to investors by presenting an upbeat picture without disclosing that the two funds they managed were plummeting in value. In particular, Mr. Cioffi was found not guilty of insider trading charges on accusations that he moved $2 million he had invested in one of the failing subprime hedge funds to another less risky fund while telling investors he was adding to his position. The government accused them of defrauding at least 300 investors out of $1.6 billion. The two had been charged with three counts of securities fraud and two counts of wire fraud. They still face civil damages in regard to the hedge funds. Massachusetts sued Bear Stearns Asset Management, accusing Mr. Cioffi of making hundreds of trades on behalf of the hedge fund with the approval of the fund's independent directors. In late 2007 Bear disclosed in an SEC filing that the funds were the subject of a criminal investigation. Bear, which collapsed in early 2008, was a major player in the subprime mortgage market. Previous to its collapse, Bear operated a trading desk and a warehouse unit, and also owned a mortgage banking firm called Encore Credit. (Photos: Bloomberg News)

The number of default notices filed against California homeowners fell in the third quarter of 2009 compared with the prior three-month period, the result of lenders' evolving foreclosure policies and an uptick in the number of mortgages being renegotiated, according to San Diego-based MDA DataQuick, which monitors real estate activity nationwide. A total of 111,689 default notices were sent out during the July-through-September period. That was down 10.3% from 124,562 for the second quarter, and up 18.5% from 94,240 in third quarter 2008. "It may well be that lenders have intentionally slowed down the pace of formal foreclosure proceedings. If so, it's not out of the goodness of their hearts. Trying to keep motivated, employed homeowners in their homes might be the most cost-efficient way to stem losses," said John Walsh, DataQuick president. The lenders that originated the most loans that went into default in the third quarter were Countrywide (7,583), Washington Mutual (5,146) and Wells Fargo (4,425). Along with Bank of America (1,979) and World Savings (4,237), they were also the most active lenders in the second half of 2006. The quarter's default rate on loans originated in the second half of 2006 ranged from 1.7% or Bank of America to 11.9% for World Savings. Smaller subprime lenders had far higher default rates for the period: ResMAE Mortgage was at 73.9%, OwnIt Mortgage 69.5%, BNC Mortgage 61.4%, Argent Mortgage 59.9% and First Franklin 59.4%. While these and most other subprime lenders are long gone, their loans were bundled, resold and now live on as "troubled assets," Mr. Walsh said. "There's a batch of truly nasty loans that were made in mid 2006. There's another batch made in late 2006. These are worse than the mortgages before and after, and it's taking a long time to process them."

The House Financial Services Committee has approved a bill that would create a new Consumer Financial Protection Agency and revise the appraisal standards across the entire mortgage lending industry. By a 39-29 vote, the committee passed a bill which would give the newly-created CFPA director the authority to set and enforce the rules for mortgage and credit card lending. The new agency would take over the consumer lending rulemaking authority from the federal banking agencies. During the markup, the committee agreed to an amendment that would call on the CFPA director to work with the industry to establish one set of appraisal independence standards that would replace the Home Evaluation Code of Conduct adopted by Fannie Mae and Freddie Mac.

Fitch Ratings has found that 60% of borrowers with performing loans in 2006 and 2007 U.S. mortgage securitizations are in negative equity positions and hundreds of seasoned deals are stressed as well, albeit to a lesser extent. Fitch said it has taken various rating actions on 649 seasoned, prime residential mortgage-backed securities transactions issued prior to 2005, citing pressure from negative home-equity positions and unemployment. However, it noted that in seasoned deals, while it has downgraded a significant number of mezzanine and subordinate classes, less than 5% of senior classes with top AAA ratings were negatively affected. Despite positive home price figures over the summer, Fitch projects over the next year a further home price decline of approximately 10% nationally. Even with the modifications and the first-time homebuyer tax credit helping home prices to some extent, the growing distressed inventory expected to result from continuing borrower stresses will cause prices to continue falling, according to Fitch senior director Grant Bailey. This means performing-to-delinquency roll-rates could stay high in prime as well as alternative-A and subprime credit RMBS from 2006/2007 into next year, Fitch said. The rating agency forecast in a recent global economic outlook report that unemployment would continue to rise and peak at 10.3% in the middle of 2010. It noted that this is a particular concern in California, where the greatest percentage of 2006/2007 RMBS borrowers is located. In California, unemployment is at 12.2% as compared to 9.8% nationally.

Even though JPMorgan Chase posted strong third quarter earnings, the mega bank set aside $4 billion in mortgage-related credit charges, including $1.1 billion tied to Washington Mutual, which it bought a year ago. It also posted a $1 billion loss in its consumer lending division, which includes mortgage banking, a business center that it is scaling back. The charge related to WaMu reflects "deterioration" in its "purchased credit-impared portfolio," JPM said. The bank said it took credit hits on subprime loans ($422 million), prime ($525 million) and home-equity loans ($1.1 billion). All were easily more than double the dollar amount of charge-offs in 3Q 2008. In an analyst report, Credit Suisse notes, "We had expected only nominal reserve increases on the consumer side this quarter." CS analyst Moshe Orenbuch called the WaMu charge a "catch-up" noting that "while there may be one more of these marks" it should not be recurring. Overall, JPM earned $3.6 billion in the quarter, a 583% jump from the same period last year.

Fitch Ratings has downgraded 748 bonds in 479 residential mortgage-backed securities transactions to D, indicating that the bonds have taken principal writedowns. All the bonds in question had ratings of CCC, CC or C, indicating that a default was expected. Three hundred and seventy-five of the bonds downgraded are backed by subprime credit mortgages, 177 are backed by alternative A credit mortgages, 123 are backed by second-lien loans, 72 are scratch and dent transactions and the balance are other types of transactions.

Robert Grosser, former chief executive of Cityscape Financial, an early high flyer of the subprime business of 1990s, has been named president of Luxury Mortgage, Stamford, Conn. Luxury is buying Homestar Direct, a mortgage firm that Mr. Grosser formed in 1999 after the publicly traded Cityscape filed for bankruptcy protection. Homestar's origination platform focused on consumer direct marketing utilizing diverse channels to reach target borrowers. Homestar is becoming part of Luxury in an asset acquisition transaction. Mr. Grosser will work with Luxury's CEO David Adamo on the overall day-to-day management of the firm with a focus on the following areas: new business opportunities, regulatory/compliance, accounting, human resources, vendor management, facilities management, capital planning, capital raising, strategic planning and risk management. Cityscape was based in Elmsford, N.Y.