Servicing

Subprime and alternative-A mortgage concerns appear largely responsible for a double-digit percentage decline in net income reported by the Bear Stearns Cos. in its latest fiscal quarter.The Wall Street firm saw approximately a 33% drop in net income to $362 million for the second quarter (ending May 31) vs. that of the same period a year earlier. An extraordinary noncash charge was partly responsible, but even with that item removed, Bear saw about a 10% slide in net income to $486 million from that of the second quarter of 2006. That decrease appears to be largely attributable to a 21% falloff in fixed-income revenue, to approximately $962 million, from that of a year earlier. The revenue from other major Bear business lines detailed in the company's earnings release generated lesser percentage declines or gains, the company said. An increase in expenses was also seen during the quarter. Wall Street firms were largely expected to be insulated from the subprime market's woes due to their diversification. Bear Stearns can be found online at http://www.bearstearns.com.

Seven states are driving the trends in mortgage foreclosure rates, according to the Mortgage Bankers Association's National Delinquency Survey.The percentage of loans on one- to four-unit residential properties in the foreclosure process stood at 1.28% at the end of the first quarter, up from 1.19% in the fourth quarter and 0.98% a year earlier, the survey found. The rate of loans entering foreclosure stood at 0.58% on a seasonally adjusted basis, up from 0.54% in the fourth quarter and 0.41% a year earlier. "The percentage of loans in foreclosure would be well below the average of the last 10 years were it not for Ohio, Michigan, and Indiana, and the rate of foreclosures started nationwide would have fallen were it not for big jumps in California, Florida, Nevada, and Arizona," said MBA chief economist Doug Duncan. "Those states have special circumstances that do not reflect what is happening in the rest of the country." The delinquency rate (which does not include loans in foreclosure) for residential mortgage loans fell from 4.95% in the fourth quarter to 4.84% in the first quarter, but the rate was up from 4.41% a year earlier. The MBA can be found online at http://www.mortgagebankers.org.

Two classes from two Citigroup Mortgage Loan Trust transactions have been placed on Rating Watch Negative by Fitch Ratings.The affected securities are class M-12 of series 2005-HE4 and class M-13 of series 2005-OPT4. Fitch also upgraded 12 classes from two Citi transactions and affirmed the ratings on 124 classes in 11 transactions. The negative rating actions reflect increased pressure on the credit enhancement available to offset losses, the rating agency said.

Three classes in two Conseco Finance home equity transactions have been downgraded by Fitch Ratings.The downgrades were as follows: Conseco Home Equity 2001-D, class B-2, from CC/DR3 to C/DR5; and Conseco Home Equity 2002-B, class B-1, from BBB-plus to BBB, and class B-2, from BB-plus to B-plus. Fitch also upgraded one class and affirmed the ratings on over 40 classes in various Conseco/Green Tree Finance home equity and home improvement deals. The rating agency said the downgrades stem from a deteriorating relationship between credit enhancement and expected losses.

Six classes from three Aegis Asset-Backed Securities Trust deals have been downgraded by Fitch Ratings.The downgrades were as follows: series 2003-1, class M2, from BBB-plus to BB (and placed on Rating Watch Negative), and class B1, from CC/DR3 to C/DR4; series 2003-3, class M3, from A-minus to BBB, and class B, from BBB-minus to B; and series 2004-3, class B2, from BBB to BB-plus (and removed from Rating Watch Negative), and class B3, from BBB-minus to BB-minus (and removed from Rating Watch Negative). Fitch also affirmed the ratings on nine other classes in the three transactions. The downgrades were attributed to deterioration in the relationship between credit enhancement and loss expectations. The collateral pools for both deals consist of subprime residential mortgage loans. Fitch can be found online at http://www.fitchratings.com.

Freddie Mac resumed quarterly reporting for the first time since 2002, citing a net loss of $211 million ($0.46 per share) that it attributed primarily to mark-to-market losses on its derivatives portfolio and credit spread widening.Freddie Mac also reported that it recorded net income of $2 billion ($2.80 per share) in the first quarter of 2006. Richard Syron, Freddie Mac's chairman and chief executive officer, noted that "[h]ousing prices declined, mortgage credit tightened, and credit spreads and OAS spreads widened" in the first quarter, which he termed a "very challenging period" for the housing and mortgage markets. "As you can see in our GAAP and fair-value results, we were affected by these changes," he said. "Despite these headwinds, Freddie Mac gained ground last quarter." Guaranteed portfolio volumes rose 16% on an annualized basis, resulting from a shift in mortgage originations back to long-term fixed-rate products, which Mr. Syron characterized as Freddie Mac's "sweet spot." The increase "has enabled us to regain some share from the private-label market and to grow at twice the rate of the market as a whole," he said. "Importantly, we have achieved this growth while maintaining a more cautious view than most towards credit risk. This has helped our aggregate credit statistics, such as delinquencies, to stay lower than the market as a whole."

Four tranches from two Countrywide securitizations have been placed under review for possible downgrade by Moody's Investors Service.The affected classes are as follows: Reperforming Loan REMIC Trust 2003-R2, classes B-3 and B-4, and CWMBS Series 2003-R3, classes B-3 and B-4. The review is based on the fact that the collateral has experienced higher-than-expected losses. "The effect of such losses has been that unrated subordinate tranches have experienced writedowns which have reduced the credit enhancement available to rated tranches which rely on subordination for protection," Moody's said. The underlying collateral consists of reperforming loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.

Two certificates from the C-BASS 2002-CB6 Trust subprime mortgage securitization have been downgraded by Moody's Investors Service.Class B-2 was downgraded from Baa3 to Ba2, and class B-3 was downgraded from Ba1 to Caa2. The downgrades were based on a decrease in available credit enhancement, Moody's said. The rating agency attributed the decline to an increase in losses and a reduction in subordination resulting from the passing of performance triggers and a stepdown in overcollateralization. The underlying assets in the transaction consist of subprime residential mortgage loans.

More than 176,100 foreclosure filings were reported nationwide in May, up 19% from the level recorded in April and up nearly 90% from that of a year earlier, according to RealtyTrac, an online foreclosure marketplace based in Irvine, Calif.The nation's foreclosure rate stood at one foreclosure filing for every 656 households, the company said in its May 2007 U.S. Foreclosure Market Report. (Foreclosure filings include default notices, auction sale notices, and bank repossessions.) "After a barely perceptible dip in April, foreclosure activity roared back with a vengeance in May," said James J. Saccacio, chief executive officer of RealtyTrac. "Such strong activity in the midst of the typical spring buying season could foreshadow even higher foreclosure levels later in the year." The company said Nevada, Colorado, and California recorded the highest foreclosure rates in May. The company can be found online at http://www.realtytrac.com.

Consumers want "frictionless" loan servicing by a lender that resolves problems quickly and bridges the gap between origination and servicing, according to a panelist at the SourceMedia Mortgage Servicing Conference in Dallas.Lori Gray, senior vice president for business development at SunTrust Mortgage, told conferees that a 2006 J.D. Power and Associates survey in which SunTrust ranked No. 1 among servicers in consumer satisfaction also contained perplexing information. "We were a little surprised and hurt to learn that the less our borrowers heard from us, the happier they were," Ms. Gray said. What consumers want, she said, is frictionless loan servicing, and toward that end SunTrust allows retail origination officers to maintain a kind of ownership over their customers. If consumers have a question about the way their loan is being managed, they can call the person they probably know best at SunTrust, Ms. Gray said. Timothy Ryan, senior director for the mortgage practice at J.D. Power, said consumers view mortgage servicing less as a relationship and more as a utility. The lower the level of interaction they have with their servicer, the more likely they are to give their loan servicer high marks for customer satisfaction.