Servicing

Lennar Corp., a Miami-based homebuilder, and Morgan Stanley Real Estate, New York, have announced the formation of a joint venture to acquire, develop, manage, and sell residential real estate.The new venture has acquired a diversified portfolio of land from Lennar consisting of approximately 11,000 homesites in 32 communities around the country, the companies reported. Lennar purchased a 20% ownership interest and 50% voting rights in the investment venture. It will manage the venture's operations and will receive fees for its services. The companies can be found online at http://www.lennar.com and http://www.morganstanley.com/realestate.

The FBI's Mortgage Fraud Report indicates that up to 70% of early payment defaults may be linked to borrower misrepresentations on mortgage loan applications, according to Rapid Reporting, a Fort Worth, Texas-based provider of fraud prevention products and services.The study found that mortgage defaults were largely concentrated in adjustable-rate loans, but occurred among other types as well. The report also revealed that seven of the 10 states with the highest concentration of mortgage fraud were also among the top 10 states for foreclosures: California, Florida, Georgia, Indiana, Michigan, Ohio, and Texas. "While it would be naïve to assume that we could narrow the cause of every foreclosure down to one single factor, this FBI information clearly indicates that borrower fraud plays a significant role in the record number of defaults and foreclosures we've been seeing over the past couple of years," said Jay Meadows, chief executive officer for Rapid Reporting. He said lenders can "significantly reduce" defaulted and foreclosed loans by implementing a good fraud prevention program. Rapid Reporting can be found online at http://www.rapidreporting.com.

Mortgage servicers are going to face many challenges in processing loan modifications of subprime adjustable-rate mortgages, including the capacity of their systems to deal with the loan impairment requirements of Financial Accounting Standard 114.Mortgage servicers are concerned that "they don't have the systems infrastructure in place today" to manage loan modifications in compliance with FAS 114, Steve Davies of PricewaterhouseCoopers told a meeting of the American Institute of Certified Public Accountants on Nov. 30. Once a loan is modified, it has to be evaluated for impairment on an individual basis to determine the loss. Servicers generally evaluate groups of mortgages segmented into loan types. Industry groups are expected to ask the Financial Accounting Standards Board for some relief.

A panel of mortgage professionals -- including the chief executives at Fannie Mae and Washington Mutual -- have told an OTS-sponsored forum that they believe a series of interest rate cuts by the Federal Reserve could help alleviate the current liquidity crisis facing the nonconforming mortgage market."The Fed needs to keep cutting rates," WaMu chairman and CEO Kerry Killinger told the Office of Thrift Supervision housing forum, adding that "We need liquidity for the immediate future, not three years from now." Mr. Mudd said lower rates could help banks clear out their inventory of collateralized debt obligations and specialized investment vehicles. North Carolina Banking Commissioner Joseph A. Smith Jr. cautioned that too many rate cuts "could cause another mess" by adding too much liquidity.

A pickup in loan modifications could be an important factor in keeping the U.S. economy out of recession, according to Mark Zandi, chief economist of Moody's Economy.com.Speaking at a housing forum sponsored by the Office of Thrift Supervision, Mr. Zandi argued that the Federal Reserve Board has to be aggressive in cutting interest rates and said 20% to 30% of adjustable-rate mortgages need to be modified before they reset to give the housing and mortgage markets any chance of a recovery. Countrywide Financial Corp. chairman and chief executive Angelo Mozilo said he supports the Bush administration's effort to increase loan modifications. However, he stressed that the lack of liquidity in the secondary market (except for Fannie Mae, Freddie Mac, and Federal Housing Administration-eligible loans) is putting downward pressure on sales and house prices. Mr. Mozilo called on the administration to relax its grip on Fannie and Freddie so the two mortgage giants can use their resources to "jump-start" the secondary mortgage market and restore investor confidence.

Hope Now alliance members are close to agreeing on a systematic approach for dealing with resets on adjustable-rate mortgages, but they are still developing criteria for determining which borrowers will be eligible for streamlined refinancings and loan modifications."I am confident they will finalize these standards soon," Treasury Secretary Henry Paulson told a housing forum sponsored by the Office of Thrift Supervision. Secretary Paulson also stressed that he expects the industry to implement the streamlined procedures "quickly" and create benchmarks for measuring their success in preventing foreclosures. One mortgage industry executive said he expects that an agreement on the criteria and for freezing the initial interest rate for borrowers facing an unaffordable reset will be worked out by the end of the week. Meanwhile, Secretary Paulson saluted the Hope Alliance members for expanding the capacity and hours of its 888-995-HOPE hotline so that struggling homeowners can talk with a mortgage counselor 24 hours a day.

Two classes of Asset Backed Funding Corp. mortgage pass-through certificates have been downgraded by Fitch Ratings.Class M-2 of ABFC series 2002-SB1 has been downgraded from A to BBB and placed on Rating Watch Negative, and class M-3 has been downgraded from BB to B-minus/DR1 and removed from Rating Watch Negative. The ratings on two other classes in the deal were affirmed. The downgrades were attributed to the deterioration of credit enhancement relative to loss expectations. The collateral consists of first- and second-lien subprime mortgage loans.

Two classes of notes from Triaxx Funding High Grade I Ltd., which invests in residential mortgage-backed securities, have been downgraded by Fitch Ratings.The class B-1 mezzanine floating-rate notes were downgraded from AA to BB, and the class B-2 mezzanine floating-rate notes were downgraded from BB to B. Both classes remain on Rating Watch Negative. The downgrades were attributed to concerns about potential margin calls by the repo counterparty if there is a further drop in market prices. Triaxx invests in triple-A rated RMBS assets using proceeds raised by issuing notes and equity and using repo funding, Fitch said.

Two certificates issued by Terwin Mortgage Trust 2004-EQR1 have been downgraded by Moody's Investors Service and one of them has been placed on review for possible further downgrade.Class M-2 was downgraded from Ba1 to B3 and placed on review for possible further downgrade, and class B-1 was downgraded from Caa3 to C. Class M-1 was also placed on review for possible downgrade. The negative rating actions were attributed to credit enhancement levels that were deemed to be low in view of current loss projections. "This transaction is not performing as anticipated due to the rising loss severities, delinquency rates, and realized losses," Moody's said. The collateral consists of nonperforming first-lien residential mortgage loans.

Ten classes of notes issued by Duke Funding High Grade II-S/EGAM I Ltd., a collateralized debt obligation used to acquire mortgage-backed securities, have been downgraded by Fitch Ratings.The downgraded notes were as follows: class A2 and series 2 class A2, from BBB-minus to CCC; class B1 and series 2 class B1, from BB to CC; class B2 and series 2 class B2, from BB-minus to CC; class C and series 2 class C, from B to CC; and class D and series 2 class D, from CCC to CC. All the notes remain on Rating Watch Negative. The downgrades were attributed to "significant declines in portfolio value." Fitch said the proceeds of the notes are used to buy a diversified portfolio of triple-A rated, primarily private-label residential MBS.