Servicing

Senior Republicans on the House Financial Services Committee are supporting efforts by Comptroller of the Currency John Dugan to curb "stated-income" loans, for which subprime lenders don't verify the borrower's income."We were interested to see Comptroller Dugan's recent remarks on stated-income loans, or 'liar loans,' and are deeply concerned about the explosion in originations of these mortgages in the subprime market," Reps. Spencer Bachus (Ala.), Paul Gillmor (Ohio), and Judy Biggert (Ill.) say in a letter to federal banking regulators. As previously reported, Comptroller Dugan wants to place curbs on stated-income loans in the subprime guidance that regulators are finalizing. The representatives acknowledge there should be a "small niche" for stated-income loans. But they also contend that "these low-doc or no-doc loans with a high LTV and [prepayment] penalties" increase the risks of default. "Current circumstances in the housing market have exposed these poorly underwritten loans, and we would ask the regulators to closely examine the role the use of liar loans may have played in the subprime market defaults we are experiencing," the committee members said.

Classes G and H of Merrill Lynch Mortgage Investors Inc. mortgage pass-through certificates, series 1999-C1, have been downgraded by Fitch Ratings, and class F has been placed on Rating Watch Negative.Class G was downgraded from B to B-minus/DR1, and class H was downgraded from CC/DR3 to C/DR5. The rating agency also affirmed its ratings on six other classes in the deal. The negative rating actions "are due to expected losses on the assets in special servicing (11.4%), in addition to the uncertainty surrounding the timing of the disposition of assets that have been in special servicing for over 24 months," Fitch said.

Thirty-one classes of Structured Asset Securities Corp. mortgage pass-through certificates have been downgraded by Fitch Ratings, and 12 classes have been placed on Rating Watch Negative.The affected classes are part of seven SASCO transactions issued in 2003 and 2006. In addition, Fitch upgraded three classes and affirmed the ratings on 73 classes from 17 SASCO deals. The negative rating actions were attributed to a deterioration in the relationship between credit enhancement and expected losses. The transactions consist of fixed- and adjustable-rate, conventional mortgage loans, virtually all of which have original terms to stated maturity of 30 years. Fitch can be found online at http://www.fitchratings.com.

IndyMac Bancorp Inc., Pasadena, Calif., has announced the pricing of $500 million of noncumulative perpetual preferred stock by its wholly owned subsidiary, IndyMac Bank FSB.The preferred stock pays a dividend of 8.5%. Scott Keys, IndyMac's chief financial officer, said the offering would increase IndyMac Bank's Tier I capital from $2.1 billion to $2.6 billion, based on the company's balance sheet as of March 31. Morgan Stanley & Co. and Goldman Sachs & Co. were the joint book-running managers of the offering. The company can be found online at http://www.indymacbank.com.

Mortgage Bankers Association chairman John Robbins has urged Congress and federal regulators to refrain from mandating underwriting standards that could precipitate a credit crunch.Mr. Robbins told the National Press Club that the mortgage industry has the tools and the capacity to help distressed subprime borrowers avoid foreclosure. The subprime market is already correcting itself, the most aggressive lenders have been punished, and the most aggressive lending programs have been eliminated, Mr. Robbins maintained. Mandating tougher underwriting would force lenders to shut the door on homeowners who need to refinance out of adjustable-rate 2/28 mortgages and exacerbate delinquencies and foreclosures, he warned. "We hope the regulators take a realistic view and allow the industry to deal with the issue and not try to regulate or legislate," Mr. Robbins said. The MBA chairman did call for the licensing and regulation of mortgage brokers.

Federal banking regulators could issue subprime mortgage guidance in the next few weeks, and it will look a lot like the original proposal, according to John Reich, director of the Office of Thrift Supervision.In speaking to reporters, Mr. Reich indicated that the final guidance will require lenders to underwrite adjustable-rate 2/28 mortgages at the fully indexed rate and that it should satisfy the demands of Senate Banking Committee Democrats. However, he wants to be sure that lenders have the flexibility to modify or refinance existing subprime ARMs that are due to reset over the next 12 months so the monthly payments remain affordable and the borrowers are not forced into foreclosure. "That is an issue that the regulators need to address," Mr. Reich said, and he indicated that the issue is still being worked on. Separately, Comptroller of the Currency John Dugan said he wants the guidance to curb the practice of making "stated-income" subprime loans and emphasize the importance of verifying a borrower's income.

Mortgage lenders Fifth Third Bancorp, Cincinnati, and R&G Financial Corp., San Juan, Puerto Rico, have signed an agreement under which Fifth Third will acquire the Puerto Rican company's R-G Crown Bank, which operates 30 branches in Florida and three in Augusta, Georgia.The combination strengthens Fifth Third's presence in the Florida markets of greater Orlando and Tampa Bay and expands its footprint into the Jacksonville, Fla., and Augusta, Ga., markets. Under the agreement, Fifth Third would pay $288 million to R-G Financial for Crown and assume $50 million of trust preferred securities. Rolando Rodriguez, CEO of R&G Financial, said the transaction "reflects the company's determination to concentrate its operations and core competencies in Puerto Rico. Second, and just as significant, the completion of the transaction will improve the RGF's overall liquidity and capital position."

Two classes of GE Capital home equity loan pass-through certificates have been downgraded by Fitch Ratings.Class M of series 1997-HE1 was downgraded from BBB to BB-minus, and class B2 of series 1999-HE3 was downgraded from BBB to BB. Fitch also affirmed the ratings on six other classes in three deals, and downgraded the Distressed Recovering rate of class B3 of series 1999-HE3 from DR3 to DR4. Fitch attributed the downgrades to the deterioration of credit support relative to steady or rising monthly losses.

Four classes from two subprime New Century Mortgage Corp. securitizations have been downgraded by Fitch Ratings.The downgrades were as follows: series 2003-2 total groups 1 & 2, class M-3, from BBB to BBB-minus, and class M-4, from BBB-minus to BB-minus; and series 2006-S1, class M-7, from BBB to BB, and class M-8, from BBB-minus to BB-minus. Fitch also placed class M-6 of series 2006-S1 on Rating Watch Negative and affirmed the ratings on 80 classes in 11 New Century deals. The negative rating actions stemmed from the deterioration of credit enhancement relative to expected losses, Fitch said. The rating agency can be found online at http://www.fitchratings.com.

The default rate on subprime adjustable-rate mortgages originated in 2006 "rose briskly" to 7.4% in April, according to a Friedman Billings Ramsey report.Researchers at the investment banking firm based in Alexandria, Va., said the default rate on subprime ARMs had jumped 16.4% since March. Meanwhile, the default rate on subprime ARMs originated in 2005 increased by 5%, to 9.8%, in April. "In comparison to previous origination years, the default rates of the 2005 and 2006 origination years deteriorated considerably faster than the 2002-2004 origination years," the FBR researchers said. (Default rates include loans that are 90 days or more past due, in foreclosure, or real estate owned.) The report also shows that the default rate on fixed-rate subprime product originated in 2006 edged up to 3.5% in April. But the default rate of 2005 fixed-rate product actually declined slightly to 6.8%. Looking at all securitized subprime mortgages, the default rate hit 11.4% in February, according to a previous FBR report.