Servicing

Former Bear Stearns executives Ralph Cioffi and Matthew Tannin, who managed two subprime hedge funds that collapsed last summer, have been indicted on securities fraud and insider trading in regard to the funds' management. Until recently, little was known about the hedge funds because they were organized under a Bear affiliate, Bear Stearns Asset Management, and incorporated in the Cayman Islands, where bankruptcy laws allow companies to disclose a minimum about their operations. According to the U.S. attorney's office in Brooklyn, where the indictments were handed up, the hedge funds held at least $1.4 billion in investors' money by the end of 2006. In a statement, the U.S. attorney's office said that Messrs. Cioffi and Tannin "believed that the funds were in grave condition and at risk of collapse. However, rather than alerting the Funds' investors and creditors to the bleak prospects of the funds and facilitating an orderly wind-down, the defendants made misrepresentations to stave off withdrawal of investor funds." (For the full story, see the June 23 issue of National Mortgage News.)

Over 400 individuals have been charged with mortgage fraud as the result of a national "takedown" led by the Department of Justice and the Federal Bureau of Investigation. The law enforcement operation called "Malicious Mortgage" netted real estate agents, mortgage brokers, appraisers, and others allegedly engaged in lending fraud, foreclosure rescue schemes, and mortgage-related bankruptcy schemes. So far, the three-month sweep had led to 287 arrests and 173 convictions, and 82 individuals have been sentenced, the DoJ said. The Mortgage Bankers Association and the American Financial Services Association welcomed the crackdown. "We support efforts to prosecute unscrupulous operators who give the mortgage industry a bad name," AFSA president Chris Stinebert said. MBA president Kiernan Quinn said the sweep shows that federal authorities are taking the issue of mortgage fraud seriously. "We will continue to work with the FBI to help them target these kinds of crimes," Mr. Quinn said. The FBI said it has set up 42 task groups and working groups around the country that are investigating 1,400 mortgage fraud cases.

Ten tranches from three alternative-A transactions issued by Morgan Stanley have been placed under review for possible downgrade by Moody's Investors Service. The downgrades, in general, were based on higher-than-expected rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels, the rating agency said. The collateral consists primarily of first-lien, fixed- and adjustable-rate alt-A mortgage loans. Moody's can be found on the Web at http://www.moodys.com.

Ambac Financial Group Inc., a bond insurer that has been pressured by its past exposure to mortgage debt securities hard-hit by the recent market crisis, has decided to terminate its ratings contract with Fitch and asked Fitch to withdraw its ratings. Fitch said it will consider the request. "Our decision to refocus and realign our business around our core expertise in the public finance and infrastructure sectors has led us to re-evaluate our ratings needs," Ambac said. Both Ambac and fellow bond insurer MBIA have been battling negative rating actions by Fitch and other rating agencies, which in turn are under political pressure to show that their ratings sufficiently reflect credit risks and are not compromised by rated companies' payments for services. Bond insurers' ratings are a focal point for the market because of their potential ripple effects on the debt securities they insure.

Washington Mutual Inc., Seattle, has announced the commitment of an additional $1 billion to help homeowners with subprime mortgage loans avoid foreclosure. WaMu noted that the pledge brings the commitment to its borrowers' assistance program to $3 billion. "Since the fund was first established in April 2007, WaMu has helped more than 7,500 homeowners work to avoid foreclosure," said Kerry Killinger, WaMu's chief executive officer. Under the program, eligible WaMu subprime borrowers who remain current on their loans and expect payment increases may apply for new, discounted fixed-rate loans or certain other mortgage products, the company said. The thrift can be found on the Web at http://www.wamu.com.

The National Association of Home Builders is supporting the housing bill despite it limitations, and the trade group is urging others to compromise so that the landmark legislation can be passed and sent to the president. "We are urging everyone to stop demagoguing and start compromising for the sake of economy," NAHB chief executive Jerry Howard said. The NAHB wanted a broader homebuyer tax credit and a net operating loss carry-back provision so builders could deduct losses in 2008 and 2009 from their profits in prior years and receive a tax rebate. But the housing bill now under consideration in the Senate limits the tax credit to first-time homebuyers, and the NOL provision has been dropped. Mr. Howard said the organization is willing to support the limited tax credit and expressed hope that "others on Capitol Hill that have a couple of outstanding issues will realize the value and necessity of being flexible, too." Otherwise the most important housing bill since 1992 "could go down the tubes," he said.

Moody's Investors Service has downgraded Fremont Investment & Loan's servicer quality rating from SQ4-minus to SQ5 as a primary servicer of subprime mortgage loans. Moody's also removed the SQ rating from review for possible downgrade. "The action is prompted by the sale and transfer of Fremont's remaining mortgage servicing rights on their $12.2 billion serviced portfolio to Litton Loan Servicing LP," the rating agency said. "With the completion of this sale, Fremont no longer services subprime residential real estate loans for others."

In a follow-up to regulatory approvals for CapitalSource Inc., Chevy Chase, Md., to buy certain assets and liabilities of Fremont Investment & Loan, Fremont General Corp., Brea, Calif., has filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Fremont General stressed that FIL has not filed for bankruptcy, but court approval will be needed to complete the sale to a de novo California-chartered industrial bank being formed by CapitalSource. Fremont General previously sold its $12.2 billion mortgage servicing rights portfolio to Litton Loan Services, a division of Goldman Sachs. Meanwhile, CapitalSource will make a public offering of 30 million shares of common stock. "This is a 'play offense' capital raise," said John K. Delaney, CapitalSource chairman and chief executive. "With the recent regulatory approval of CapitalSource Bank (in organization), we are well positioned to seize opportunities in the current favorable market conditions."

Two classes of subprime pass-through certificates from Soundview Home Equity Loan Trust series 2001-1 have been downgraded by Fitch Ratings. Class M-1 has been downgraded from AA-minus to CCC/DR1, and class M-2 has been downgraded from CC/DR2 to C/DR5. Fitch also affirmed the triple-A rating of class A.

Citing declining home prices and deteriorating credit trends, Cincinnati-based Fifth Third Bancorp has announced several moves aimed at strengthening its capital position. Fifth Third said it plans to issue $1 billion of convertible preferred shares to shore up its Tier 1 capital, reduce its quarterly dividend from $0.44 per share to $0.15 per share, and sell certain noncore businesses. The company said it has revised its target Tier 1 capital ratio to 8%-9%. Meanwhile, Fitch Ratings downgraded the long- and short-term Issuer Default Ratings, among others, of Fifth Third and its principal bank subsidiaries. The long-term IDRs were downgraded from AA-minus to A-plus, the short-term from F1-plus to F1. The downgrades were attributed to "the company's deteriorating trends in asset quality, expectations for elevated levels of problem assets in the near term, and a decline in profitability.... The majority of credit weakening is concentrated in Michigan and Florida, and centered in the home equity, homebuilder/developer, and residential mortgage portfolios."