Servicing

Fannie Mae and Freddie Mac are defending their need for higher prices on riskier products, maintaining at the Mortgage Bankers Association's Secondary Market Conference in Boston that the first requirement under their charters is to provide liquidity to the market. "Our goal is to fulfill our mission of providing liquidity," said Thomas Lund, Fannie Mae's executive vice president for single-family mortgage business. "We need to align our prices to the risk we take in the marketplace to make sure we will be a liquid secondary-market provider." Patricia Cook, Freddie Mac's executive vice president and chief business officer, said her company is "approaching pricing in a risk-managed way" because the method used to price mortgages in the past is now passé. "Average pricing worked" in a narrow market, she explained. But with a wide array of products and underwriting requirements, it works "less effectively." Ms. Cook told the conference that Freddie Mac has struggled with a high default rate and declining profitability, so it had no choice but to re-evaluate its pricing. "We know you're hurting, but so are we," she said. The GSEs can be found online at http://www.fanniemae.com and http://www.freddiemac.com.

A Federal Housing Administration bill approved by the House Financial Services Committee last week will fall far short of its goal of helping 1 million at-risk borrowers avoid foreclosure, according to budget analysts. The Congressional Budget Office estimates that the FHA refinancing bill (H.R. 5830) would refinance only 500,000 homeowners into FHA loans during the life of the four-year program, when 2.8 million borrowers are expected to face foreclosure proceedings. The budget analysts note that the bill requires holders of first liens to write down loans to about 85% of the current appraised value, and they would have "an incentive to direct their highest-risk loan into the program." Other liens must be extinguished, which leaves little incentive for second lienholders to participate, unless a foreclosure sale is imminent. About 40% of subprime and alternative-A mortgages have second liens. "CBO estimates about 25% of the loans with second liens could be refinanced under this new program," the agency said.

A new research report by Friedman Billings Ramsey predicts that if Bank of America moves forward with its purchase of Countrywide Financial Corp., it may face $30 billion in loan writedowns once the deal closes. FBR's advice to BoA is to "completely walk away" from the deal. Late last week BoA filed an amended S-4 with the Securities and Exchange Commission, noting that there is no assurance that any of Countrywide's debt will be redeemed, assumed, or guaranteed. The filing prompted Standard & Poor's to downgrade Countrywide's debt to junk status, from BBB-plus/A-2 to BB-plus/B. (Roughly 25% of Countrywide's subprime servicing portfolio is delinquent.) FBR also says it believes that BoA will soon renegotiate the purchase price down to $2 or less per share from $7. Countrywide's spokesman could not be reached for comment by MortgageWire's deadline.

Seven certificates from two transactions issued by Terwin Mortgage Trust and backed by second-lien loans have been downgraded by Moody's Investors Service. The downgrades were as follows: series 2005-11, class I-M-1b, from Aa2 to A1, class I-M-2, from Aa3 to Baa3, class II-M-1, from Aa2 to Baa1, and class II-M-2, from Aa3 to Baa3; and series 2005-13SL, class G, from Aaa to Baa1, class M-1, from Caa2 to C, and class B-1, from Ca to C. Moody's also maintained the four downgraded certificates from series 2005-11 on review for possible further downgrade. The downgrades were attributed to the fact that credit enhancement, including excess spread and subordination, was low in view of projected losses. "The actions take into account the continued and worsening performance of transactions backed by closed-end-second collateral," Moody's said.

Nine classes of mortgage pass-through certificates from Quest Trust series 2006-X2 have been downgraded by Fitch Ratings. Fitch also placed another class in the deal on Rating Watch Negative, removed from Rating Watch Negative the classes previously placed there, and affirmed the ratings on two other classes.

Fitch Ratings has downgraded 10 classes of notes and preference shares from two collateralized debt obligations backed partly by mortgage-backed securities. The affected securities are four classes of notes and one class of preference shares issued by Enhanced Mortgage Backed Securities Fund III Ltd., and four classes of notes and one class of preference shares issued by Enhanced Mortgage Backed Securities Fund IV Ltd. Both are mortgage market value CDOs. Fitch attributed the downgrades to "significant" declines in the net asset values of the CDOs, putting them "closer to hitting the class C and class D trigger levels." If the triggers are breached, the transactions "would be forced to sell assets, which would result in the realization of further losses," the rating agency said.

Fitch Ratings has downgraded 12 classes of notes from three collateralized debt obligations backed partly by subprime residential mortgage-backed securities. The affected securities are four classes of notes issued by Robeco High Grade CDO I Ltd.; four classes issued by C-BASS CBO XV Ltd.; and four classes issued by C-BASS CBO XVI Ltd. All three transactions are static cash flow CDOs. All the downgraded classes were removed from Rating Watch Negative. Fitch attributed the downgrades to "significant collateral deterioration" in the portfolios, especially subprime RMBS, alternative-A RMBS, and -- in two of the three CDOs -- structured finance CDOs with underlying exposure to subprime RMBS.

More than 150 additional classes of subprime mortgage-backed securities were downgraded by Fitch Ratings on May 1. Fitch also affirmed the ratings on classes with outstanding balances of approximately $7.5 billion. The securities affected by the latest downgrades were: 38 classes from 18 issues by Ameriquest Mortgage Securities Inc.; 37 classes from six issues by Park Place Securities Inc.; 36 classes from 17 issues by Residential Asset Securities Corp.; 24 classes from seven issues by Ace Securities Corp.; and 17 classes from nine issues by Argent Securities Inc.

Standard & Poor's on has officially halted the rating process for closed-end second-lien mortgages and related residential mortgage-backed securities, citing the sector's inordinately poor performance. "[T]his market segment does not allow for a meaningful analysis of new issuance and securitization," the rating agency said in a report. "The magnitude of our recent rating actions and projected losses on the 2007 U.S. [closed-end second-lien] vintage transactions reflect an unprecedented level of loan performance deterioration. As a result, we will not rate any new U.S. RMBS CES transactions or any transactions that contain CES mortgage loans." S&P can be found on the Web at http://www.standardandpoors.com.

Goldman Sachs mortgage head and managing director Daniel Sparks has stepped down and been replaced by two other executives from within the firm who will co-head the unit, a spokesman has confirmed. Justin Gmelich, head of credit trading, and Tom Cornacchia, head of credit sales, will be filling Mr. Sparks' previous position as managing directors in the mortgage area, the spokesman said.