Servicing

Standard & Poor's Ratings Services has lowered its risk-to-the-government rating on Fannie Mae from AA-minus to A-plus. S&P also affirmed its AAA/A-1-plus senior unsecured debt rating and its AA-minus subordinated debt and preferred stock ratings on the government-sponsored enterprise. The ratings were removed from CreditWatch Negative, and the outlook is deemed negative on all except the senior unsecured debt rating, which is stable. "The lower risk-to-the-government rating reflects Fannie Mae's weak earnings and pressured capital ratios, which are outside the tolerance for a AA-minus rating," said S&P credit analyst Victoria Wagner. (Fannie has posted three straight quarterly losses, S&P noted.) The rating agency said Fannie is facing "the most challenging housing and mortgage cycle in more than three decades," and its core earnings are weakened from higher credit-related expenses and "significant spread widening" on mortgage-backed securities. However, its exposure to subprime mortgage risk -- 1.9% of its total single-family mortgage portfolio -- is "extremely low," S&P said. The rating agency can be found online at http://www.standardandpoors.com.

Following a similar decision by Fannie Mae, Freddie Mac has eliminated its controversial policy of requiring borrowers to put up larger downpayments in markets where home prices are declining. "Beginning June 1, 2008, we will allow maximum financing up to 95% LTV for most Freddie Mac mortgages in all markets," Freddie says in a May 16 e-mail message to its approved lenders. Under its declining-markets policy, the maximum amount of financing was reduced by 5% in markets where lenders determined that house prices are falling. On May 2, Freddie issued a bulletin to its lenders revising the policy so that the loan-to-value ratio of 95% became the floor for most loan products. "The practical effect [of the May 16 change] is that lenders no longer have to make that determination about a declining market," a Freddie spokesman said. As previously reported, Fannie is scrapping its declining-markets policy starting June 1. Freddie Mac can be found online at http://www.freddiemac.com.

In an attempt to restructure its debt, Residential Capital Corp. of Minneapolis says it has received "requisite consents" from a certain number of investors that hold $14 billion of its outstanding notes. In a statement released over the weekend, ResCap said the consents have the effect of lifting "restrictive covenants" that are tied to "events of default." At deadline time, a ResCap spokeswoman could not be reached for comment. The company is negotiating a new $3.5 billion two-year credit facility with its parent company. ResCap, the parent of GMAC Mortgage, lost $859 million in the first quarter, compared with a loss of $910 million a year earlier. ResCap is the nation's eighth-largest residential lender and seventh-largest servicer, according to the Quarterly Data Report.

MBIA Inc., Armonk, N.Y., has been designated the "Bear of the Day" for May 19 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. Noting that MBIA's loss of $3.01 per share in the first quarter was "substantially worse" than the Zacks estimate of $0.30 per share, the research firm said the "bulk of the loss came through the unrealized pretax loss of $3.6 billion on the company's credit derivatives portfolio and [collateralized debt obligations]." Zacks said the entry of Berkshire Hathaway into the bond insurance business will "further intensify competition" and that possible further deterioration in the mortgage markets "should not bode well for results over the next several quarters." Zacks can be found online at http://www.zacks.com, and MBIA can be found at http://www.mbia.com.

A survey of U.S. households by Online Resources Corp. shows that personal financial stability continues to decrease, as the mortgage crunch, rising energy costs, and a falling savings rate hit more households. The survey of more than 1,000 households found that Americans in all demographic groups continue to prioritize among their bills by creating a "delinquency budget." Of those surveyed, 52% of households reported that it is harder to meet their financial obligations, an increase from 43% six months ago. More than half of the households reported using savings to pay for living expenses or household bills. Although credit cards continued to have the highest reported delinquency rate, mortgage and utility delinquency rates have increased significantly in the past six months. Fourteen percent of households with an income greater than $100,000 reported being delinquent, and 13% of households whose mortgage is paid off also have at least one bill 30 or more days overdue. In addition, the Web, by a growing margin, continues to be consumers' preferred method for resolving their delinquency, the survey found.

National Asset Direct, a purchaser of distressed residential assets and loans, has hired Ray Schalk, Melissa Dant, and Jill Parker, all formerly of Accredited Home Lenders, to senior management positions. Before joining NAD's whole loan trading team, Mr. Schalk sold loans and participated in the securitization of subprime and alternative-A loans for Accredited's capital markets group. He will be responsible for all aspects of loan acquisitions, including maintaining communication with sellers at all levels, monitoring credit and real estate market trends, and managing NAD's pricing model. Ms. Dant, who has been named general counsel, will be responsible for all legal affairs of the entire company and its affiliates. She was formerly associate general counsel at Accredited Home Lenders. Ms. Parker, NAD's director of project management, is responsible for all NAD and iServe (mortgage, real estate, servicing) projects. She previously managed the project office for Accredited Home Lenders.

A new GSE regulator should require Fannie Mae and Freddie Mac to adjust their investment portfolios in a "countercyclical manner" so they could provide more liquidity for the mortgage market the next time the housing market goes bust, according to the director of the Office of Federal Housing Enterprise Oversight. OFHEO Director James Lockhart told a banking conference that the two government-sponsored enterprises loaded up on risky loans and securities during the recent housing boom, and now they are dealing with credit losses and have been forced to raise capital. In a future downturn, Fannie and Freddie could provide more liquidity for the mortgage market if their regulator requires them to build up capital during the boom and sets standards for the operation of the portfolios so they can provide "liquidity and stability to the secondary mortgage market at all points in the credit cycle," Mr. Lockhart said. Congress is working on a GSE reform bill that would authorize the new regulator to set such standards. "An important issue for supervisory agencies is how to create incentives for institutions to behave in a less pro-cyclical manner without interfering with their ability to earn reasonable returns on capital," the GSE regulator said.

Mortgage servicers of REMIC securitizations no longer have to wait for a borrower to miss a payment before they contact and offer a homeowner a loan modification with a lower interest rate or principal reduction, according to an Internal Revenue Service ruling. Revenue Procedure (2008-28) opens the door for servicers to actively identify borrowers likely to end up in foreclosure without jeopardizing the tax status of a real estate mortgage investment conduit. "This is an important change that will allow more homeowners who may potentially get in trouble to be able to have their loans modified prior to default," said Anne Canfield, executive director of the Consumer Mortgage Coalition. The IRS recognizes that servicers have developed sophisticated programs to identify borrowers likely to default using data such as declining credit scores, falling house prices, or interest rate resets. Once they form a reasonable belief that there is significant risk of foreclosure, "then they can go ahead and contact the borrower before any payment goes late," IRS associate counsel Susan Baker said. Currently, REMIC regulations prohibit a loan modification before the borrower is in default.

The California Department of Real Estate has granted a license to originate and service first mortgage loans to iServe Servicing Inc., a wholly owned subsidiary of National Asset Direct, a purchaser of distressed residential assets and loans. With this approval, iServe is now qualified to service first mortgage loans in 29 states, including Florida, Illinois and Texas, and exempt from qualification in 10 additional states, qualifying iServe to service first mortgage loans in a total of 39 states. iServe's "high-touch" servicing system is designed to correctly diagnose a borrower's unique conditions, match creative solutions to meet the best interests of the borrower, and encourage resolutions that provide immediate relief, near-term stabilization, and promote long-term viability of retaining homeownership. Louis Amaya, chief investment officer and chief operating officer of NAD, said, "We are particularly pleased to be able to offer our solutions to borrowers in California, which continues to represent a disproportionate share of the foreclosure starts in the country. In an environment where third-party servicers have been inundated with a growing number of nonperforming mortgages, being able to service our portfolio of loans provides NAD with a critical competitive advantage."

Ten classes from four scratch-and-dent mortgage-backed securities transactions issued by Citigroup Mortgage Loan Trust have been downgraded by Fitch Ratings. Fitch also placed four classes of securities on Rating Watch Negative and affirmed the ratings on more than $340 million of scratch-and-dent MBS.