Servicing

The credit performance of subprime mortgage-backed securities issued in 2007 is no better than that of the subprime MBS issued in 2006, according to a Friedman Billings Ramsey report that challenges the assumption that lenders became more conservative in their underwriting earlier this year."We find scant evidence that the risk characteristics of subprime loans originated in 2007 differ significantly from those of subprime loans originated in 2006 and 2005. Therefore, we cannot conclude that lenders have reversed" their liberal underwriting criteria, FBR managing director Michael Youngblood said. The default rate on adjustable-rate subprime MBS issued in 2007 jumped 44% in August, rising from 2.80% in July to 4.04%. This is higher than the average 3.05% default rate for subprime MBS issued in previous years at the same age. "We note that the leading mortgage banking company in the United States, Countrywide Financial Corp., did not fully revise its underwriting criteria for subprime mortgage loans until August 15, 2007," the FBR report says.

Former Hanover Capital managing director George Ostendorf has launched a new firm to invest in distressed and illiquid mortgages.Mr. Ostendorf began working on the formation of American Mortgage Capital Group LLC earlier this year, right after he resigned from the Chicago-based Hanover. For now, AMCG will focus on buying first liens secured by residential properties. The distressed loan market could swell to more than $100 billion as the subprime crisis results in record foreclosures over the next year. AMCG is headquartered in Bannockburn, Ill.

By a 5-4 vote, a House Judiciary subcommittee has approved a controversial bankruptcy bill that would allow distressed homeowners to file for bankruptcy and get their mortgages restructured.During the mark-up of the bill, Rep. Chris Cannon, R-Utah, agreed to withdraw a key amendment that would cap the amount of principal that could be reduced in bankruptcy at 10% of the fair value of the property after Rep. Mel Watt, D-N.C., pledged to work with the congressman to perfect the language. Rep. Watt signaled that he is "sympathetic" to the intent of the amendment but is concerned that it might create a long, drawn-out process for determining the value of the property. Democrats are planning to mark up the bankruptcy bill (H.R. 3609) soon in the full Judiciary Committee and move it quickly through the House, despite opposition from the financial services industry. Sen. Richard Durbin, D-Ill., has introduced a similar bankruptcy bill in the Senate.

Deutsche Bank tallied the charges it expects to take on mortgages and related products in the third quarter and an analyst cut estimates for Merrill Lynch as the market continued to buzz about the credit crunch's potential effect on forthcoming Wall Street earnings.Deutsche Bank says it anticipates taking charges of approximately 1.5 billion euros (about $2.1 billion) on structured credit products, residential mortgage-backed securities, and relative value trading in both credit and equities in the third quarter. Meanwhile, CIBC World Markets analyst Meredith Whitney has cut its estimate of Merrill Lynch's third-quarter earnings from $2.00 to $0.97 per share "to reflect the challenging capital markets conditions and lingering effects of subprime [mortgages]." A number of news reports also said some fixed-income executives have recently left Merrill Lynch. Merrill had not responded to a call for comment at deadline time.

Goldman Sachs & Co. is exploring the possibility of buying Litton Loan Servicing, Houston, the nation's 12th-largest servicer of subprime mortgages, according to industry sources.As of MortgageWire's deadline, a spokesman for Goldman declined to comment. Litton is a unit of Credit-Based Asset Servicing & Securitization LLC, New York, a specialty servicer. C-BASS, in turn, is owned by mortgage insurers MGIC Investment Corp. and Radian Group, which in August wrote down their investments in C-BASS by more than $1 billion after the company was the subject of margin calls. Observers note that a sale of Litton would not necessarily include C-BASS or what's left of Fieldstone Mortgage, Columbia, Md., a nonprime lender that C-BASS purchased earlier this year.

The First American Corp. has announced that it will host the Mortgage Bankers Association's school of mortgage servicing Dec. 11-13 at First American's Westlake, Texas campus.Participants in the MBA's servicing school earn credits toward a Certified Mortgage Servicer designation. Dennis Jankowski, senior vice president of First American's default information services group, will coordinate First American's role in the event. Topics will include portfolio valuations, servicing sales and acquisitions, customer service, escrow, default, loss mitigation, and real-estate-owned transactions. Additional information can be found online at http://www.campusmba.org.

The class A-2 notes issued by Orchard Park CDO Ltd., a collateralized debt obligation partly composed of residential mortgage-backed securities, has been placed on Rating Watch Negative by Fitch Ratings.Fitch said the action "reflects significant credit migration, whereby approximately 12.58% of the portfolio is currently rated below investment grade." In addition to RMBS, the transaction consists of asset-backed securities and other CDOs, the rating agency said.

Class B-1 of Birch Real Estate CDO I Ltd., a collateralized debt obligation consisting mainly of residential mortgage-backed securities, has been downgraded from BB to B by Fitch Ratings.The ratings on five other classes of notes in the transaction were affirmed. Fitch attributed the downgrade to par coverage that has "continued to erode" due to defaulted and distressed assets. Approximately 81% of the transaction is composed of residential MBS, while commercial MBS and asset-backed securities account for approximately 12% and 7%, respectively.

Four certificates from three transactions issued by CHL's Alternative Loan Trust in 2004 have been downgraded by Moody's Investors Service, and one certificate has been placed under review for possible downgrade.The downgrades were as follows: series 2004-6CB, class M-2, from A2 to Baa3; series 2004-6CB, class M-3, from Baa2 to B3; series 2004-8CB, class M-3, from Baa2 to Baa3; and series 2004-J5, class B, from Baa2 to Ba1. Class B of series 2004-J13 was placed under review for possible downgrade. The four classes were downgraded "because the current credit enhancement provided by subordination, overcollateralization, and excess spread is low compared to the projected pipeline losses of the underlying pool," Moody's said, while the watchlist placement was attributed to "the growing pipeline and higher-than-expected losses." All the deals are backed by first-lien alternative-A mortgage loans originated or acquired by Countrywide Home Loans Inc.

Four certificates from two subprime deals originated in 2003 by Ameriquest Mortgage Co. have been downgraded by Moody's Investors Service.In addition, 26 certificates from 13 subprime deals originated in 2002 and 2003 by Ameriquest and Argent Mortgage Co. (the retail and wholesale mortgage loan originators, respectively, of ACC Capital Holdings) have been placed on review for possible downgrade. The downgrades were as follows: Ameriquest Mortgage Securities Inc., series 2003-7, class M-4, from Baa2 to Ba2; series 2003-7, class M-5, from Ba1 to Caa1; series 2003-AR2, class M-3, from Ba1 to Caa1; and series 2003-AR2, class M-4, from Ba3 to Ca. The negative rating actions were based on an analysis of the credit enhancement levels provided by excess spread, overcollateralization, and subordinate classes relative to the expected loss, Moody's said. Moody's can be found online at http://www.moodys.com.