Servicing

Pay-option adjustable-rate mortgages will default at dramatically higher rates in 2009 and beyond as large volumes of loans reset to the full payment after the payment option period expires, according to Fitch Ratings. Most option-ARM loans gave borrowers the choice to make a minimum monthly payment for a period of time, typically five years, before the loan terms recast to require full monthly payments to ensure full amortization over the loan term. Of the approximately $200 billion of option-ARM loans outstanding, Fitch estimates that $29 billion are scheduled to recast by the end of 2009 and an additional $67 billion will recast in 2010. The "potential average" monthly payment increase, according to Fitch, will add $1,053 to the monthly bill of those homeowners, on top of a current monthly average payment of $1,672. Fitch says the large payment increases will cause defaults to "more than double" after the loan terms recast.

Three classes of notes issued by Enhanced Mortgage Backed Securities Fund I Ltd., a collateralized debt obligation consisting partly of mortgage-backed securities, have been downgraded by Fitch Ratings. The downgrades were as follows: class A, from AAA to BBB; class B-1, from A to BB; and class B-2, from BBB to B. Because the majority of the CDO's underlying collateral matures after the maturity date of the transaction, EMBS I will liquidate a significant amount of collateral at the November 2009 maturity date, Fitch reported in explanation of the downgrades. "Lower asset prices and poor liquidity could adversely affect the likelihood of repayment of rated notes," the rating agency said. The CDO is backed by MBS, collateralized mortgage obligations, asset-backed securities, U.S. government obligations, corporate securities, cash, and cash equivalents.

Thirty-six classes of notes issued by seven collateralized debt obligations with exposure to subprime residential mortgage-backed securities have been downgraded by Fitch Ratings. All but one of the downgraded classes were removed from Rating Watch Negative. The affected securities are as follows: eight classes from Independence VII CDO Ltd., a cash flow structured finance CDO; seven classes from Whateley CDO I Ltd., a cash flow CDO; six classes from Duke Funding VIII Ltd., a cash flow structured finance CDO; six classes from Straits Global ABS CDO I Ltd., a cash flow structured finance CDO; five classes from Capmark VI Ltd. and Capmark VI Delaware Corp., a hybrid CDO; three classes from South Coast Funding I Ltd., a cash flow structured finance CDO; and one class from ABSpoke 2005-X Ltd., a partially funded static synthetic structured finance CDO. The downgrades were attributed to collateral and credit deterioration in the portfolios, especially in subprime RMBS, alternative-A RMBS, or structured finance CDOs.

Three series of bonds issued by the WM Covered Bond Program have been downgraded from AAA to AA by Fitch Ratings. Series 1, 2, and 3 were downgraded as a result of the current BBB/F2 rating of Washington Mutual Bank and "the risk posed to the continuity of payments on the covered bonds in the event of a default by [WaMu Bank]," the rating agency said. Under the program, covered bonds are ultimately secured over an $11.7 billion portfolio of U.S. residential mortgage loans held by the bank, Fitch explained. Noting the recent issuance of criteria for U.S. covered bonds by the Federal Deposit Insurance Corp., the rating agency said WaMu Bank's mortgage loans "do not meet the new criteria." As a result, a 90-day stay period is required in case the bank becomes insolvent, "which could delay access to the pledged collateral if a sale were required to repay the covered bonds before the end of their maturity extension period," Fitch said. Fitch can be found on the Web at http://www.fitchratings.com.

Mack-Cali Realty, a real estate investment trust based in Edison, N.J., has been designated the "Bear of the Day" for Aug. 29 by Zacks Equity Research, Chicago. The Bear of the Day is a stock expected to underperform the markets over the next three to six months. Zacks said it is maintaining its Sell recommendation on the office REIT "due to macroeconomic factors" and that suburban office landlords are expected to "have a tough time over the next 12 months." Office occupancies in the company's core markets have risen rapidly, making it difficult to hold occupancy and increase rents, the research firm said. Zacks can be found online at http://www.zacks.com, and Mack-Cali can be found at http://www.mack-cali.com.

Fannie Mae says it will not purchase "subprime loans" as defined by a recently passed New York lending law that goes into effect Sept. 1. "Fannie Mae will not purchase or securitize any mortgage loan that meets the definition of a subprime loan under New York law, regardless of whether any provision of the law is pre-empted by federal law with respect to a particular mortgage or for a particular originator," according to Fannie announcement 08-21. The New York legislature created a new category of subprime loans that falls between prime and higher-cost loans. "The [subprime] threshold is so low that FHA loans and lower-grade Fannie Mae and Freddie Mac loans get dangerously close to crossing the threshold, and in some cases cross the threshold," said Don Romano, president of Shelter Rock Mortgage Corp. in Lake Success, N.Y. On Aug. 12, Freddie Mae said it would not purchase New York subprime loans. Fannie can be found online at http://www.fanniemae.com.

The upward swing in delinquency and foreclosure rates that began in mid-2007 is still climbing and "still getting worse," according to Sam Khater, a senior economist at LoanPerformance CoreLogic. For alternative-A and subprime loans, "it is literally like a 45-degree angle going up," he told MortgageWire. LoanPerformance data show that 28% of subprime loans are 60 days or more past due or in foreclosure as of June 30, up from 15% in June 2007. Meanwhile, the percentage of alt-A loans 60 days or more past due hit 13.6% in June, up from 3.8% a year ago. "They are not going to plateau anytime soon irrespective of the loan modifications or repayment plans," Mr. Khater said.

Wachovia Corp., the nation's largest payment-option ARM investor ($122 billion at last count), is treating its portfolio like a "distressed asset" and will be taking more hits on the loans, according to a new report issued by Sandler O'Neill. Wachovia, whose option adjustable-rate mortgage product is called "Pick-a-Pay," is trying to refinance some of its customers into Federal Housing Administration loans, Sandler reported. Wachovia inherited much of its option ARM exposure from Golden West Financial of Oakland, a thrift operated by the husband-and-wife team of Herb and Marion Sandler. Wachovia bought the lender two years ago, right before the housing market began its historic decline. Sandler analyst Kevin Fitzsimmons and other investors recently met with new bank chief executive Robert Steel, who indicated that Wachovia is trying to get foreclosures off its books as quickly as possible. The bank is forecasting 12% losses on its Pick-a-Pay portfolio.

Fifteen classes of notes issued by two Nautilus collateralized debt obligations linked to alternative-A and subprime residential mortgage-backed securities have been downgraded by Fitch Ratings. All the downgraded classes were removed from Rating Watch Negative. The affected securities are as follows: eight classes from Nautilus RMBS CDO IV Ltd./LLC and seven classes from Nautilus RMBS CDO III Ltd./LLC. Both are static cash flow CDOs. The downgrades were attributed to credit deterioration within the portfolio and underlying exposure to alt-A and subprime RMBS.

RBS Greenwich Capital, Greenwich, Conn., has announced an expansion of its mortgage business via the addition of 16 professionals to its mortgage-backed securities team, 15 of them from Bear, Stearns & Co. Leading the new hires is Scott Eichel, who will co-head asset-backed and mortgage trading with RBS veteran David Cannon. The other 15 new employees include seven traders and eight salespeople who join RBS's institutional MBS sales team, the company said. RBS, a wholly owned subsidiary of The Royal Bank of Scotland, can be found online at http://www.rbsgc.com.