Servicing

Over 50 classes in 19 scratch-and-dent mortgage-backed securities transactions from four issuers have been downgraded by Fitch Ratings. The affected securities were: 32 classes from nine Structured Asset Securitizations Corp. issues; 12 classes from seven C-BASS Mortgage Loan Trust issues; six classes from two Goldman Sachs issues; and one class from a Wilshire issue. Fitch also placed 13 classes of securities on Rating Watch Negative and affirmed the ratings on nearly $1.4 billion of scratch-and-dent MBS.

Prudential Bancorp Inc., Philadelphia, has reported a mortgage-related net loss of $682,000 ($0.06 per share) for the first quarter, compared with net income of $965,000 ($0.08 per share) a year earlier. Prudential said the loss stemmed from the recognition of a $1.5 million pretax impairment charge related to a $35 million investment in a mutual fund that holds mortgage-backed securities. "The impairment charge was related to declines in fair value due to interest rate movements and significantly reduced investor interest in mortgage-related securities, and was not related to any credit quality concerns with respect to the assets underlying the mutual fund," the company said. Prudential Bancorp is the mid-tier holding company for Prudential Savings Bank, which can be found online at http://www.prudential savingsbank.com.

Fitch Solutions has acquired an equity stake in Portsmouth Financial Systems, a Portsmouth, N.H.-based provider of advanced structured finance analytics. The terms of the transaction were not disclosed. "Portsmouth has developed a cutting-edge software platform that supports the modeling and analysis of structured finance transactions, with products ranging from collateral-level analytics to cash flow modeling tools," Fitch Solutions said. The platform has been beta-tested with investment banks, asset managers, and hedge funds, and production versions will be launched within a few months, the company said. Fitch Group, the parent company of Fitch Ratings, launched Fitch Solutions in January "to provide further separation of Fitch's analytical activities from its commercial activities" and to accelerate the development of fixed-income data and analytics solutions. The company can be found online at http://www.fitchsolutions.com.

Fitch Ratings has placed Fannie Mae's preferred stock, rated AA-minus, on Rating Watch Negative in the wake of Fannie's announcement that it plans to raise $6 billion in new capital and reduce its common stock dividend. "While Fitch views the prospect of incremental capital and dividend reduction positively, the proportion of preferred stock to total capital may grow higher from already elevated levels," the rating agency said. "As a result, Fitch believes that preferred shareholders could absorb higher losses as their proportion of total capital increases. This scenario would warrant a one-notch differential between [Fannie Mae's] subordinated and preferred stock ratings." Fitch expressed skepticism about Fannie's projection that the additional capital will fund growth and absorb higher credit losses, opining that it will not be sufficient to fund new business. The rating agency can be found online at http://www.fitchratings.com.

Fitch Ratings has moved all its ratings on Countrywide Financial Corp., Calabasas, Calif., from Rating Watch Positive to Rating Watch Evolving. Fitch said the action stems from further disclosures about Bank of America's planned treatment of Countrywide debt after its proposed acquisition. The rating agency said it believes the acquisition will be completed, but that the rating action reflects "uncertainty over the transaction's final structure." Fitch can be found on the Web at http://www.fitchratings.com.

Mortgage-backed securities investors and servicers should start thinking about becoming landlords so a troubled borrower can remain in a house with an option to buy the property back, according to a conservative academic panel that monitors regulation of the financial services industry. The Shadow Financial Regulatory Committee says it would be less disruptive and costly to offer homeowners facing foreclosure a lease in exchange for the deed to the property. Investors would incur a loss as part of the deed-in-lieu transaction, but avoid foreclosure maintenance and resale costs, according to Kenneth Scott, professor of law and business at Stanford University. The shadow committee noted that the Treasury Department's Hope Now initiative does not address the problem of delinquent borrowers with negative equity. This approach "might be able to deal with a large portion of these delinquencies without the taxpayer bailing out the homebuyer or the investor." Mr. Scott said.

A Federal Reserve Board survey has found that banks continue to tighten their underwriting standards on prime mortgages and home equity lines of credit even as demand for these loan products has weakened. About 60% of senior loan officers indicated they had tightened their lending standards on prime mortgages over the past three months, according to the April survey. In a January survey, 55% of respondents reported tightening. The April survey also shows that 70% of respondents tightened their standards on HELOC applicants. In response to "special questions," 50% of loan officers reported tightening terms on existing HELOCs over the past six months, mainly due to declines in house prices. "Large majorities of respondents also cited increased defaults of material obligations under loan agreements, as well as significant changes in borrowers' financial circumstances, as additional reasons for tightening terms on existing HELOCs," the Fed said.

Federal Reserve Board Chairman Ben S. Bernanke came very close to endorsing a bill the House of Representatives is scheduled to vote on this week that would allow the Federal Housing Administration to refinance borrowers with "underwater" mortgages. The widespread decline in house prices requires lenders and servicers to develop new and flexible strategies to prevent foreclosures, the Fed chairman said in an address to the Columbia Business School. "[T]he best solution may be a writedown of principal or other permanent modification of the loan by the servicers, perhaps combined with a refinancing by the FHA or another lender," he said. The House Financial Services Committee approved an FHA refinancing bill (H.R. 5830) by a 46-21 vote May 1 that offers investors/servicers an option to refinance an underwater mortgage into an FHA-insured loan if they agree to write down the loan amount to 85% of the current appraised value. "It's in everyone's interest" to prevent avoidable foreclosures, Mr. Bernanke said, because of the "spillover effects" rising foreclosures can have on the financial markets and broader economy.

Plans for a real estate mortgage investment conduit vehicle for government reverse mortgage loans are moving along, according to Justin Burch, senior mortgage banking analyst at Ginnie Mae. The Home Equity Conversion Mortgage REMIC, which has been discussed for the past six months, "is coming," Mr. Burch told attendees at the Mortgage Bankers Association's National Secondary Market Conference in Boston. He said the financial instrument is the "next critical piece" in the evolution of the secondary market for reverse mortgages.

The chairman of the House Financial Services Committee is pushing for a package that gives the industry incentives to clean up the foreclosure glut, but he told the Mortgage Bankers Association's National Secondary Market Conference in Boston that if the package fails to achieve its aim, mortgage market participants may see much more onerous regulation. The package includes a proposal that would allow loan holders who voluntarily write down the principal amount of loans that borrowers cannot "reasonably" repay to refinance the mortgage into a written-down loan with a Federal Housing Administration guarantee. Rep. Barney Frank, D-Mass., also said he would be holding a hearing later in May that would shed light on why the temporary loan limit increase has not produced more results.