Servicing

Defaults on securitized subprime mortgage loans jumped to 23.3% in December, up 200 basis points from the level of the previous month and more than double the 10.1% rate of a year earlier, according to a Friedman Billings Ramsey Investment Management report. The credit performance of private-label securities backed by subprime, alternative-A, and prime mortgages is "deteriorating more rapidly and more broadly than previously," said FBRIM managing director Michael Youngblood. He attributes the acceleration in defaults to "weakening labor market conditions and falling house prices." In the 25 metropolitan statistical areas with the highest default rates, the average unemployment rate was 6% and the MSAs had a net loss of 104,240 jobs over the previous year, according to the monthly credit performance report. Meanwhile, the default rate on alt-A loans rose to 7.2% in December, up 153 bps from that of the previous month and 555 bps from the rate in December 2006. (The default rate includes loans 90 days or more past due, loans in foreclosure, and real estate-owned.)

Thornburg Mortgage has met a $300 million set of margin calls related to deteriorating mortgage-backed securities market conditions, but was still working to meet about $270 million more as of deadline time Monday. The company said it was in default with one reverse-repurchase counterparty involved in the second set of margin calls but that it was working to repay that counterparty, which had not yet exercised its right to liquidate collateral. The company said collateral liquidations could have a material effect on its finances if they occur, and stressed that the repayment difficulties are linked to market conditions rather than credit quality. The company's stock was trading at about $4.00 per share late Monday morning, a drop of more than 50% from its previous close of $8.90 per share, according to Yahoo Finance.

Losses on mortgage securities in the current financial crisis may total roughly $400 billion, resulting in "much larger" decreases in lending and balance sheet shrinkage topping $1 trillion, according to a recent report by Wall Street and business school experts. The report indicates that the losses, combined with the effects of leverage of mark-to-market accounting, could lead to "just under a $2 trillion contraction in intermediary balance sheets" and reduce growth in gross domestic product over four quarters by "roughly 1 to 1.5 percentage points." Authors of the report have affiliations with Morgan Stanley, Goldman Sachs, the University of Chicago, the National Bureau of Economic Research, the Federal Reserve Bank of Chicago, and Princeton University.

More than 350 additional classes of first-lien subprime mortgage pass-through certificates were downgraded by Fitch Ratings on Feb. 28 as a result of changes to its subprime loss forecasting assumptions. Fitch also affirmed the ratings on classes with outstanding balances of $6 billion. The securities affected by the latest downgrades were 208 classes from 19 J.P. Morgan deals and 150 classes from 12 First Franklin deals. The rating actions were attributed to changes to Fitch's subprime loss forecasting assumptions that "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness." Fitch can be found on the Web at http://www.fitchratings.com.

Standard & Poor's Ratings Services has placed 1,887 classes of alternative-A, first-lien residential mortgage-backed securities on CreditWatch with negative implications. The classes are from 404 RMBS transactions issued in 2006 and the first half of 2007, and they have a current balance of $12.9 billion, S&P reported. The actions "reflect a persistent rise in the level of delinquencies among the alt-A mortgage loans supporting these transactions," S&P said. The rating agency said it is also reviewing the affected transactions in the light of its revised assumptions for the surveillance of U.S. RMBS. The affected alt-A transactions are collateralized by negative-amortization (payment-option adjustable-rate mortgage), short-reset hybrid ARM (2/28 and 3/27), and fixed-rate and longer-dated hybrid ARM loans. S&P can be found online at http://www.standardandpoors.com.

JPMorgan Chase's retail financial services unit is looking for continued gains in its mortgage market share, but it has some concerns about the related home equity area where losses are continuing to trend higher. In a retail financial services presentation from its "investor day" meeting, the company indicated that it expects to add to its loan loss reserves in the first quarter as a result.

Conditions in the residential construction market are likely to worsen in 2008, with housing starts falling another 25%, according to a research report from the Portland Cement Association. The large number of foreclosures caused by the subprime mortgage crisis will be a major contributor to rising home inventories, which will depress construction activity, said Edward J. Sullivan, PCA's chief economist. "Typically, builders accelerate start activity when the inventory supply reaches five months," Mr. Sullivan said. "A significant improvement in sales and inventory conditions is not expected until the second half of 2009." The economist projected that the housing inventory is likely to stand at a 9.5- to 10-month supply by the end of this year. PCA can be found on the Web at http://www.cement.org.

Fremont General Corp., the Brea, Calif.-based holding company for a bank and mortgage servicer, has announced that it may need to record additional asset writedowns and reserves in its 2007 financial statements that could result in further losses or adjustments to regulatory capital. Fremont, which does business primarily through its wholly owned subsidiary Fremont Investment & Loan, said that either development would "further erode the bank's total equity capital of $448.6 million" reported in its latest Call Report and "could have an adverse effect" on its financial condition. Because of these uncertainties, Fremont's independent auditors have delayed the completion of their 2007 audit and Fremont has delayed filing its Form 10-K with the Securities and Exchange Commission, the company said. Fremont can be found online at http://www.fremontgeneral.com.

A judge in Massachusetts has temporarily barred Fremont Investment & Loan from initiating or advancing foreclosures on "presumptively unfair" mortgage loans unless certain conditions are met, according to Buckley Kolar LLP. However, in granting the state attorney general's motion for a preliminary injunction, a Suffolk County Superior Court judge found that there was no evidence that Fremont had made false representations or had violated any federal or state consumer credit law, the law firm reported. Rather, the court found that the loans at issue fell within the "penumbra" of a state predatory-lending law governing high-cost mortgage loans. The court defined a loan as presumptively unfair if it is an adjustable-rate mortgage with an introductory period of three years or less, has a teaser rate at least 3 percentage points lower than the fully indexed rate, and meets two other tests. The other tests are that it has a loan-to-value ratio of 100%, or carries a substantial prepayment penalty (or a prepayment penalty that extends beyond the initial period), and the borrower has a debt-to-income ratio that would have exceeded 50% if the debt had been measured by the amount due under the fully indexed rate. Buckley Kolar, which serves the financial services industry, can be found online at http://www.buckleykolar.com.

Senate Republicans have blocked Democrats from rushing to the floor a foreclosure prevention bill that allows bankruptcy judges to restructure subprime and certain nontraditional mortgages. Democrats mustered only 48 of the 60 votes needed to invoke cloture and start debate on the bill (S. 3221), which also provides revenue bonds for refinancing subprime borrowers and federal grants to purchase foreclosed properties. Senate Majority Leader Harry Reid called the vote a "big victory" for Wall Street, big banks, and mortgage bankers. But as for the millions of people facing foreclosure, "they lost," Sen. Reid said. The American Financial Services Association's top lobbyist, Bill Himpler, said the industry could support the foreclosure prevention bill if the bankruptcy provision is stripped from the package. With all the market turmoil, this is not the time to consider changes to the bankruptcy code that would "essentially undermine investor confidence in mortgage lending," he said. The Democrats will likely push for another vote before March 15, when the Senate takes a two-week break. Meanwhile, the Senate Judiciary Committee has scheduled a March 6 mark-up of two competing mortgage bankruptcy bills. The bill sponsored by Sen. Richard Durbin, D-Ill., was included in S. 3221. The other bill, sponsored by Sen. Arlen Specter, R-Pa., allows bankruptcy judges to reduce or freeze the interest rate on adjustable-rate mortgages.