Servicing

Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., and other financial institutions have been working with the U.S. Treasury on a plan they believe may help mitigate the global credit crunch sparked by U.S. mortgage woes.The companies say they plan to create a single "master liquidity enhancement conduit" within the next 90 days that will agree, for a set period of time, to purchase "qualifying highly rated assets" from certain existing structured investment vehicles that choose to tap the new liquidity source. This may restore some liquidity by helping SIVs -- which borrow short-term and invest long-term -- refinance their asset-backed commercial paper borrowings. ABCP rollovers have been difficult during the credit crunch because many market participants have considered the trading value of mortgages and other assets to be uncertain, even if they have had strong credit.

The new chairman of the Mortgage Bankers Association has called for a "return to basics" as the housing finance sector enters uncharted territory.With home prices flagging in several markets and innovative loan products being tested for the first time in a negative environment, Kieran Quinn said what's important is not new government regulations or who gets bailed out and who doesn't. Rather, "it's what we do from today forward that counts," he said at the MBA's 94th annual convention in Boston. Mr. Quinn said the most important task lying before the industry is to "restore investor confidence, because right now they don't want to touch our paper." He said that if businesses and individuals "simply do what we've done for most of our careers, we'll have gone a long way" toward fixing the problems that confront the industry. The MBA can be found on the Web at http://www.mortgagebankers.org.

The increasing number of reverse mortgage originations make this product ripe for securitization, a panelist said at a session on Ginnie Mae Home Equity Conversion Mortgage mortgage-backed securities at the Mortgage Bankers Association annual convention in Boston.Arthur Axelson, a partner with Reed Smith LLP, added that the security will "revolutionize" the Federal Housing Administration's HECM loan. Craig Corn, president of BNY Mortgage Co., said the Ginnie Mae program would increase liquidity for the product as well as increase the number of secondary-market investors. "It is an incredible opportunity, but with that opportunity comes risks," he added. Theodore Foster, Ginnie Mae's senior vice president, said the agency is launching the new product because its charge is to support government-insured products. There is dramatic growth in the number of HECM originations, but no standardized secondary-market take-out for the product, he said. Among Ginnie Mae's goals is to increase availability of HECMs and to create a secondary market for them so lenders can offer more products.

Class B-2 of Morgan Stanley Dean Witter Capital I Inc. Trust series 2002-AM3 has been downgraded from B1 to Caa3 by Moody's Investors Service.The downgrade was attributed to credit enhancement levels that may be low given the projected losses on the underlying pools. "The transaction has taken significant losses, causing gradual erosion of the overcollateralization, and the most subordinate B-2 tranche is in danger of taking writedowns," Moody's said. The transaction is backed by first-lien adjustable- and fixed-rate mortgage loans originated by Aames Financial Corp.

Two tranches of CSFB Mortgage-Backed Pass-Through Certificates, series 2001-11, have been downgraded by Moody's Investors Service.Class C-B-1 was downgraded from Aaa to Aa2, and class C-B-2 was downgraded from Aa2 to Baa2. "The pools backing these securities have a very low pool factor of less than 1%, and include only five remaining loans, one of which is delinquent and another of which is in foreclosure," the rating agency said. On July 25, three subordinate tranches were fully written down due to loss, and class C-B-4 took a $4,000 writedown. "Today's action is a result of these writedowns, and also reflects the continued threat posed by remaining delinquencies in the pool which, although substantially covered by mortgage insurance, may see further high severities," Moody's said. The rating agency can be found online at http://www.moodys.com.

Moody's Investors Service has announced the downgrading of $33.4 billion of securities issued in 2006 and backed by subprime first-lien mortgages, representing 7.8% of the original dollar volume of such securities rated by Moody's.Of the downgraded securities, $3.8 billion remain on review for further downgrade. In addition, another $23.8 billion of first-lien residential mortgage-backed securities were placed on review for downgrade. Moody's also affirmed the ratings on $258.6 billion of Aaa-rated securities and $21.3 billion of Aa-rated securities. "Today's rating actions incorporate Moody's long-range views regarding the performance of the deals in question," the rating agency said. "As a result, Moody's expects less future rating volatility for 2006 first-lien RMBS as long as home price depreciation remains less than 10% from peak to trough and the current economic environment remains stable." Among the factors underlying the Moody's analysis are the assumption that the severity of loss associated with loans that are now seriously delinquent will be 40%-50% on average, and that (based on a recent survey of subprime loan servicers) significant loan modifications that might mitigate future losses are unlikely in the near term.

Nine Wall Street dealers plan to invest $180 million in Thomson Financial's TradeWeb platform, which handles mortgage-backed securities trades as well as other fixed-income and derivative deals.The dealers that have agreed to buy a minority stake and participate in TradeWeb are: Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, The Royal Bank of Scotland, and UBS. Thomson and the dealers also separately agreed to fund an expansion of the platform.

The Office of Federal Housing Enterprise Oversight is proposing to correct its loss severity calculations for mortgage defaults, which could substantially increase Fannie Mae's and Freddie Mac's risk-based capital requirements.Under the current equations, the government-sponsored enterprises record profits, instead of losses, on foreclosures of government-guaranteed loans and loans with low loan-to-value ratios. These changes would have increased Fannie's RBC requirement by $7.5 billion to $9.8 billion in the fourth quarter of 2006 and Freddie's by $4.5 billion to $5.4 billion. Fannie exceeded its RBC requirements by $16.1 billion that quarter and Freddie exceeded it by $21.4 billion. If finalized, this rule would negate any benefits the two GSEs expect when OFHEO releases them from the requirement to maintain a 30% capital surplus, according to Federal Financial Analytics, a Washington consulting firm. The regulator is expected to roll back the capital surcharge when the GSEs return to timely financial reporting next year. There is a 90-day comment period on the proposal.

An internal investigation by Beazer Homes USA has found that its mortgage unit violated Federal Housing Administration rules, "particularly in relation to downpayment assistance programs," and a possible settlement with regulators could range from $8 million to $15 million, according to the Atlanta homebuilder.The violations of Department of Housing and Urban Development rules by Beazer Mortgage Corp. date back to "at least 2000," the company said, but it did not disclose the number of FHA loans involved or the default rates on those loans. A spokesman for the HUD inspector general's office declined to comment on the Beazer investigation. The homebuilder previously disclosed that the U.S. attorney's office in Charlotte, N.C., had subpoenaed its mortgage banking unit for loan production documents. Beazer also faces civil litigation from homebuyers who lost their homes. Fitch Ratings -- citing the Beazer internal probe, accounting irregularities, and "challenging" market conditions -- downgraded Beazer's issuer default rating and its senior notes from BB to BB-minus. The ratings remain on Rating Watch Negative. Beazer can be found online at http://www.beazer.com.

House Financial Services Committee Chairman Barney Frank, D-Mass., has drafted a bill that temporarily increases the caps on Fannie Mae's and Freddie Mac's portfolios for six months so the two mortgage giants can purchase modified or refinanced subprime loans.The bill would increase the caps on the companies' $700 billion portfolios by 10%, but 85% of any mortgages purchased must benefit struggling subprime borrowers. Sen. Charles E. Schumer, D-N.Y., is expected to introduce a similar bill in the Senate. "The six month/85% bill that I am filing seems to me responsive to the immediate needs to help people avoid foreclosure," Rep. Frank said. The House committee chairman is also preparing to introduce a bill aimed at stopping abusive lending practices. And he is planning to hold hearings on and mark up the predatory lending bill this year. The committee can be found online at http://financialservices.house.gov.