Servicing

Earnings at the Federal Home Loan Bank of Chicago fell by 50% in the third quarter, and the bank is restating earnings because of an "accounting error," according to an unaudited financial statement filed with the Securities and Exchange Commission.The Chicago FHLBank reported net income of $24 million, down from $44 million in the third quarter of 2006. The bank previously reported net income of $50 million in the second quarter, but that has been revised to $27 million in correcting its hedging accounting for advances and consolidated obligations. The troubled bank's third-quarter report says it is engaged in "detailed negotiations" with the Dallas FHLBank regarding a possible merger. And it is developing strategic alternatives in case a merger is not possible. The third-quarter report also reiterates a previous warning that the Chicago bank "may experience losses in the fourth quarter of 2007 and 2008."

Three tranches from two deals issued by Credit Suisse First Boston Mortgage Securities Corp. in 2002 and 2003 have been downgraded by Moody's Investors Service.The downgrades to the CSFB Mortgage-Backed Pass-Through Certificates deals were as follows: series 2002-AR2, class I-B-1, from Aaa to A1, and class I-B-2, from Baa1 to Ba2; and series 2003-AR12, class IV-M-2, from Baa3 to Ba3. "Although the 2002 and 2003 deals have pool factors of 1.40% and 4.88%, respectively, the ratings were placed under review for downgrade based on existing credit enhancement levels relative to the current projected losses on the underlying pools," Moody's said. "The affected tranches from series 2002-AR2, for instance, are backed by only 24 remaining loans, and the pool factor is less than 2%." The collateral consists chiefly of first-lien, adjustable-rate jumbo A mortgage loans.

Twelve certificates from seven Credit Suisse First Boston mortgage-backed securities deals issued in 2002 and 2003 have been downgraded by Moody's Investors Service.Moody's also placed one certificate under review for possible downgrade. The negative rating actions were attributed to credit enhancement levels that are deemed to be low in view of projected losses on the underlying pools. "These pools of mortgages have seen high loss severities in recent months, and future losses could cause a more significant erosion of the overcollateralization in some cases," the rating agency said. CSFB Mortgage-Backed Pass-Through Certificates series 2002-5, 2002-18, and 2003-AR26 are backed by alternative-A mortgage loans, while CSFB Mortgage Securities Corp. series 2003-4, 2002-HE4, and 2002-HE16, along with CSFB Mortgage Acceptance Corp. series 2002-HE4, are backed by fixed- and adjustable-rate, first-lien subprime mortgage loans.

Moody's Investors Service has downgraded 81 tranches from 18 deals issued by Goldman Sachs in 2006 and late 2005 and has placed 15 tranches under review for possible downgrade.Two downgraded tranches remain on review for possible downgrade. The negative rating actions were based on higher-than-expected rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels, Moody's said. The collateral consists primarily of first-lien, fixed- and adjustable-rate alternative-A mortgage loans. The rating agency can be found on the Web at http://www.moodys.com.

Fitch Ratings has downgraded the short-term issuer default ratings of IndyMac Bancorp Inc. and IndyMac Bank FSB from F2 to F3.Fitch also removed IndyMac Bancorp from Rating Watch Negative and assigned it a negative rating outlook, and downgraded the rating on IndyMac Bank's short-term deposits from F2 to F3. Fitch said IndyMac's "consistent profitability, strong competitive position in nonagency lending, and the ability to meet financing needs through loan sales" have in the past justified a higher short-term IDR than its long-term IDR. "However, disruption in the nonagency secondary mortgage market has diminished these strengths and lends support to a lower short-term IDR," the rating agency said. Fitch said the revision of IndyMac's rating outlook was based on "challenging market conditions" and the fact that IndyMac "lacks the revenue diversification found in larger banks." Fitch can be found online at http://www.fitchratings.com.

Homeowners threatened with foreclosure can face serious tax problems if they do not understand the consequences of foreclosure, according to Andrew Housser, co-founder and co-chief executive officer of Bills.com, San Mateo, Calif.Mr. Housser said a former homeowner may be required to pay tax on "cancellation of debt income," which is accrued when a lender agrees to waive part or all of the so-called deficiency balance. The deficiency balance is the amount remaining due after the proceeds of a foreclosure sale are subtracted from the mortgage balance plus the fees associated with the foreclosure and sale. "If you think you may face a CODI tax liability, start talking to a tax professional now," Mr. Housser advised. The company, an online personal finance portal, can be found on the Web at http://www.bills.com.

A RealtyTrac analysis has found that foreclosures rose in 77 of the top 100 metropolitan areas in the third quarter, with California, Ohio, and Florida accounting for two-thirds of the cities with the highest foreclosure rates nationally.The highest foreclosure rates were found in Stockton, Calif.; Detroit; and Riverside-San Bernardino, Calif. Stockton recorded one foreclosure filing for every 31 households in the third quarter, the nation's highest rate among metro areas. Detroit, whose third-quarter foreclosure filing rate was one for every 33 households, saw twice as many foreclosure filings in the third quarter as in the second quarter. In Riverside-San Bernardino, the rate was one filing for every 43 households. Other cities among the top 10 for foreclosure filings were Fort Lauderdale, Fla.; Las Vegas; Sacramento, Calif.; Cleveland; Miami; Bakersfield, Calif.; and Oakland, Calif. Seven California metro areas were among the 25 cities with the highest foreclosure rates.

Fannie Mae's servicers are reworking loans for delinquent borrowers at the rate of 750 a week as part of its effort to bring stability to the housing sector, Fannie president and chief executive Daniel Mudd told real estate professionals gathered in Las Vegas Nov. 13 for their annual convention.The workouts are part of the government-sponsored enterprise's expanded effort to promote sustainable homeownership. Under its HomeStay initiative, Mr. Mudd told the National Association of Realtors meeting, Fannie Mae has also backed new, safer fixed-rate loans for 45,000 subprime borrowers who aren't yet late on their payments, but could be if they waited until their adjustable-rate mortgages reset. But in the face of what he called "the most serious disruption in the mortgage markets in decades," the Fannie CEO said the GSE could do more if it were able to buy more mortgages and its loan limits were raised in more high-cost areas. Mr. Mudd predicted that housing prices will continue to fall throughout 2008 -- and that it "may be years" before price appreciation returns to the "customary" 5% a year. But despite the dire forecast, and fear that another wave of foreclosures is coming next spring, Mr. Mudd said he had no doubt that the housing sector is on solid footing. "I completely believe we are going to get through this," he told the conference. "Beyond the correction, the future of housing looks good."

Fannie Mae and Freddie Mac should be focused on rescuing subprime borrowers as opposed to developing a new line of products to serve the jumbo market, according to the regulator of the two government-sponsored enterprises.The chairman of the Federal Reserve Board recently suggested to Congress that the two GSEs could play a role in securitizing jumbo mortgages. But James Lockhart, director of the Office of Federal Housing Enterprise Oversight, told MortgageWire that the GSEs have no expertise in the jumbo market. "Our view is that at the moment, Fannie and Freddie have their hands full in the conforming loan market -- and in particular the lower-credit-quality portion of the conforming loan market," Mr. Lockhart said in the interview. "That is where they should be concentrating their firepower." The OFHEO director said Fannie and Freddie are doing a reasonably good job in refinancing subprime borrowers that are current on their payments. However, they need to make more of an effort to help borrowers that need loan modifications or partial writedowns. "We will be discussing this with the Fed," he said.

Bank of America -- the nation's second-largest commercial bank -- says it will take a $3 billion writedown to reflect a decline in the value of mortgage securities on its books.Shortly after BoA revealed the charge, Bear Stearns & Co. said it would take a $1.2 billion writedown tied to the declining value of subprime and assets related to collateralized debt obligations. Both announcements came as executives from the two companies gave further details about their third-quarter performance. To date, banks, thrifts and Wall Street firms have taken close to $40 billion in writedowns tied to CDOs and subprime-related investments. Over the past seven years, Bear has been a major buyer and securitizer of subprime loans. BoA's role in funding the B&C market is less clear, though it was an investor in certain CDOs that contained subprime tranches.