Servicing

To encourage more loan modifications, the Federal Housing Administration will allow servicers to increase the interest rate on the loan to reduce the investor's loss when it is sold or repooled. The FHA set the maximum interest rate increase at 200 basis points above the 10-year Treasury rate, according to FHA mortgagee letter 2008-21. Mortgage servicing consultant Bob Lyons noted that it is difficult to sell modified loans at par in today's market environment and that servicers have to consider that in deciding to do a loan modification. The FHA is "trying to give them a little more latitude," he said, provided the borrower can afford payments and it results in a performing loan. Mr. Lyons' firm, Lyons McCloskey, is based in Fairfax Station, Va. The FHA is also encouraging servicers to undertake loan modifications even after the borrower has filed for foreclosure. According to the mortgagee letter, servicers can add legal fees and other expenses related to a canceled foreclosure action into the principal amount of a modified loan.

Four classes of notes issued by Enhanced Mortgage Backed Securities Fund IV Ltd. have been downgraded by Fitch Ratings, and the ratings have been withdrawn. The downgrades were as follows: class A-2, from B to C/DR4; class A-3, from B-minus to C/DR6; class A-4, from CCC to C/DR6; and preference shares, from CCC/DR6 to C/DR5. The rating actions were based on the liquidation of the transaction's portfolio, Fitch said.

Seven classes of notes issued by one collateralized debt obligation linked to subprime residential mortgage-backed securities has been downgraded by Fitch Ratings. All the downgraded classes were removed from Rating Watch Negative. The affected securities are as follows: seven classes from Bluegrass ABS CDO III Ltd., a cash flow structured finance CDO. The downgrade was attributed to collateral deterioration in subprime RMBS and structured finance CDOs with underlying exposure to subprime RMBS.

First Place Financial Corp., a small Ohio thrift, says it will write down the value of its Fannie Mae preferred stock by $1.3 million and, according to one stock analyst, "a wave of writedowns could be coming for smaller banks." FPFC of Warren, Ohio, declared that its investment in Fannie Mae preferred stock is now in a category called "other-than-temporary," which means it will take a loss on the shares that will flow through to earnings, thus reducing its net income. If FPFC felt it could recover its investment in Fannie's preferred stock it would not have to label the investment "other than temporary" and could avoid taking the charge to earnings. The writedown affects the thrift for the period ending June 30. Daniel Arnold, a stock analyst who covers FPFC for Sandler O'Neill, told MortgageWire that the thrift is not the first financial institution to take a hit on its investment in Fannie Mae's preferred shares, noting that "some big banks have taken hits, but the little ones have not."

Fifteen classes of notes issued by two collateralized debt obligations linked to subprime residential mortgage-backed securities have been downgraded by Fitch Ratings. All the downgraded classes were removed from Rating Watch Negative. The affected securities are as follows: eight classes from Fourth Street Funding Ltd./LLC and seven classes from Jupiter High-Grade CDO VII Ltd./Inc. Both are cash CDOs. The downgrades were attributed to collateral deterioration in subprime RMBS and structured finance CDOs with underlying exposure to subprime RMBS.

Liquidity pressures are limiting the ability of asset managers to remove underperforming loans from U.S. commercial real estate loan CDOs, according to Fitch Ratings. The rating agency said its delinquency index for CREL collateralized debt obligations increased to 1.46% in July, up from 0.36% in October 2007 when Fitch began tracking the numbers. Karen Trebach, a Fitch senior director, said the CREL CDO index has remained relatively low partly because asset managers had been removing underperforming loans, but that many now face capital constraints that will hamper their ability to keep doing so. "Reduced CDO cushions are becoming more commonplace with the dual pressures of reduced liquidity and increased delinquencies," Ms. Trebach said. "Constrained liquidity may also lead to more managers' modifying and extending loans rather than repurchasing them, which, if not merited, may only serve to delay the possible realization of losses on these loans." Fitch can be found on the Web at http://www.fitchratings.com.

DebtX, a Boston-based loan sale adviser, has announced the forthcoming sale of more than $292 million of nonperforming residential real estate loans. The portfolio, to be offered in 19 separate pools, contains $100 million of loans on properties in Florida, $40 million in California, $26 million in Massachusetts, $16 million in Arizona, and $16 million in Nevada, DebtX said. The vast majority (95%) are adjustable-rate loans, and 95% of the properties are occupied by the owner, the company said. The loans will be sold Sept. 18. DebtX can be found online at http://www.debtx.com.

Overstock.com Inc., Salt Lake City, has announced that its website now offers access to online real estate auctions. The company said it has joined forces with Williams & Williams, a real estate auction company based in Tulsa, Okla. "Our site provides Overstock.com customers with information from real estate auctioneers and brokers who have direct access to auction properties and local expertise," said Patrick Byrne, chairman and chief executive officer of Overstock.com. The companies can be found online at http://www.overstock.com and http://www.williamsauction.com.

The share values of Fannie Mae and Freddie Mac hit new 52-week lows Wednesday after Freddie Mac was forced to pay a record amount to raise short-term debt. At deadline time, Freddie's shares were down 21% on the day to just $3.29. Its 52-week high is $65. At one point during the morning its shares fell to $2.95. Meanwhile, Fannie Mae's stock dropped 18% to $4.93. Its intraday low was $4.74, and its 52-week high is $70. Both government-sponsored enterprises have been hurt by speculation that they will be nationalized and their common shareholders wiped out. On Tuesday, Freddie Mac priced new five-year notes at 113 basis points over the comparable Treasury obligation [see above item].

The pricing of Freddie Mac's latest Reference Notes offering at 113 basis points over comparable Treasury obligations -- the highest spread the company has ever paid on such debt -- raises new questions about its ability to raise short-term money at a reasonable cost as it struggles with massive delinquencies. Meanwhile, speculators are shorting its stock, believing that the Treasury Department may have to buy its shares, which could dilute the value of its common stock even further. Freddie hopes to raise $5.5 billion in new capital over the coming weeks but has yet to offer any guidance on how it will do so. Company chairman and chief executive Richard Syron recently said the government-sponsored enterprise will likely sell both common and preferred stock. He admitted that to attract investors to the preferred shares, the company would have to offer a double-digit yield.