Servicing

Loan modification plans that would simply freeze interest rates on some U.S. subprime mortgage loans may impair the ratings of certain residential mortgage-backed securities, according to Standard & Poor's.In a report outlining its views on a rate freeze, S&P said it supports "appropriate loss mitigation strategies" to prevent foreclosures, but that some loan modification proposals may have negative effects. "By extending the initial interest rate that homeowners paid during the fixed-rate period of their hybrid ARM loan terms, the potential for payment shock may be mitigated, thereby potentially reducing the risk of default," S&P said. "However, there may be a corresponding reduction in excess spread that was initially incorporated into our ratings analysis.... [which] may offset the benefits of lower defaults, resulting in diminished investor protection." Loan modifications may also discourage investors from participating in the first-lien subprime securitization market by reducing the payments they receive, S&P said. "The consequences of declining investor participation include reduced capital and liquidity available for homeowners and lenders, which may negatively affect home ownership rates and borrowing opportunities to creditworthy borrowers," S&P said. The rating agency can be found online at http://www.standardandpoors.com.

To deal with a large volume of loan modifications, the Mortgage Bankers Association is asking the Financial Accounting Standards Board for relief from its rules for evaluating credit impairment on hundreds of thousands of subprime adjustable-rate mortgages.The MBA has endorsed President Bush's plan to freeze the resets on subprime ARMs. However, its members maintain that they don't have the systems capacity to evaluate loan impairment under Financial Accounting Standard No. 114 on a loan-by-loan basis and would like to use FAS 5 instead. "FAS 5 provides for a cost-effective approach to accurately measuring probable credit losses on large volumes of loans, which is consistent with the objective of a loan modification, which is to reduce the prospect of future credit losses," the MBA says in a letter to FASB. Separately, the Internal Revenue Service has issued a ruling that it will not challenge the tax status of real estate mortgage investment corporations if servicers follow the American Financial Services guidelines for freezing resets on subprime ARMs. The MBA can be found online at http://www.mortgagebankers.org.

Employment in the mortgage industry appeared to stabilize in October as lenders cut their work force by 1,600 positions after purging their payrolls of 25,600 full-time employees in September.The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector declined from 403,100 in September to 401,500 in October. Since February (the high point in mortgage employment this year), the industry's work force has been reduced by 18%, and 88,300 employees have lost their jobs. There is a one-month lag in breaking out the mortgage banker/broker sector data. But Friday's jobs report points to more job losses when next month's report is released. BLS acting Commissioner Philip Rones said employment in credit intermediation declined by 13,000 in November, "reflecting weakness in housing and mortgage lending." The BLS can be found online at http://stats.bls.gov.

Two classes from Deutsche ALT-A Securities Mortgage Loan Trust 2006-AR1 have been downgraded by Fitch Ratings and removed from Rating Watch Negative.Class B-3 was downgraded from BB to B, and class B-4 was downgraded from B to C/DR4. Fitch also placed class B-2 on Rating Watch Negative and affirmed the ratings on three other classes in the deal. The downgrades resulted from a deterioration in the relationship between credit enhancement and expected losses, the rating agency said. The collateral consists of first-lien, adjustable-rate residential mortgage loans.

Three classes from two issues of Truman Capital mortgage-backed securities have been downgraded by Fitch Ratings.The downgrades were as follows: series 2002-1, class M-2, from BBB-plus to BB, and class B, from CC/DR4 to C/DR5; and series 2002-2, class M-2, from BBB-minus to BB-minus. Fitch also affirmed the ratings on three other classes in the two deals. The downgrades resulted from a deterioration in the relationship between credit enhancement and expected losses, the rating agency said. The collateral consists of first- and second-lien residential mortgage loans.

Redwood Trust Inc., Mill Valley, Calif., has announced the sale of approximately 4.1 million shares of common stock through a stock purchase and dividend reinvestment plan for net proceeds of $122.5 million."The recent dislocations in the residential mortgage market have strengthened our competitive position and brought about some welcome changes in asset pricing and the credit quality of newly issued mortgages," said Marty Hughes, Redwood's chief financial officer. "After several years of restrained growth, we are now finding attractive prime residential and other investment opportunities." He said the additional equity will allow the company to take advantage of such investment opportunities. Redwood can be found on the Web at http://www.redwoodtrust.com

New York City has announced the launch of The Center for NYC Neighborhoods, a not-for-profit organization created "to assist homeowners at risk of mortgage foreclosure throughout the five boroughs."Its projected first-year budget of $5.3 million is expected to assist 18,000 New Yorkers. According to city officials, it will be the largest program of its kind in the nation. Mayor Michael R. Bloomberg and New York City Council Speaker Christine Quinn announced that funding in the first year includes $1 million from the administration via the Department of Housing Preservation and Development and $1.8 million from the City Council. In addition, the city said the program planning committee is seeking philanthropic support, which is expected to provide the remainder of the funds from private and foundation sources. The program will operate as an independent entity dedicated to "a major expansion and coordination" of counseling and referral services, legal assistance, loan remediation, preventive outreach, and education, training, research, and advocacy around subprime lending and mortgage foreclosures.

Fitch Ratings has affirmed the triple-A issuer default and senior debt ratings of Fannie Mae and affirmed the other outstanding debt ratings of the government-sponsored enterprise.The actions came in the wake of Fannie Mae's Dec. 5 announcement that it plans to issue $7 billion of nonconvertible preferred stock in December. Fitch affirmed Fannie's preferred stock rating at AA-minus. (That action came on the heels of Fitch's Dec. 4 downgrade of Freddie Mac's preferred stock rating from AA-minus to A-plus following Freddie's $6 billion preferred stock offering.) Fitch said it believes Fannie Mae has been "prudently" managing its balance sheet, retained portfolio purchases, interest rate risk, and credit risk and will continue to do so. The rating agency can be found online at http://www.fitchratings.com.

The Federal Reserve Board will issue long-awaited revisions to its Home Ownership and Equity Protection Act regulations in two weeks to address abusive lending practices, a Fed governor has testified.The proposed HOEPA rule will address prepayment penalties, failure to escrow taxes and insurance, stated-income and low-documentation lending, and ability to repay, Fed Governor Randall Kroszner told a congressional panel. The Fed will also propose changes to its Truth in Lending Act rules to require "earlier disclosures by lenders and to address concerns about misleading mortgage loan advertisements," he testified.

The delinquency rate on residential, single-family mortgage loans reached 5.59% in the third quarter, nearly half a percentage point higher than in the second quarter, according to the MBA's national delinquency survey.The third-quarter delinquency rate was up 47 basis points from the level recorded in the second quarter and up 92 bps from that of a year earlier. The percentage of loans in foreclosure also increased sharply, rising to 1.69% of all loans outstanding. That was up 29 bps from the second quarter and up 64 basis points from one year earlier. The percentage of loans entering foreclosure rose 13 bps from the second quarter to 0.78%. Both the foreclosure inventory and foreclosure start levels were at record highs. The overall delinquency rate was the highest reported by the Mortgage Bankers Association since 1986.