Servicing

Five classes of mortgage pass-through certificates issued by Ace Securities Corp. have been downgraded by Fitch Ratings as a result of changes in the rating agency's subprime loss forecasting assumptions.The downgrades were as follows: Ace 2005-HE2, class B-1, from BB to C/DR3, and class B-2, from BB-minus to C/DR5; and Ace 2005-HE3, class M-9, from BB to BB-minus, class B-1, from BB-minus to B, and class B-2, from B-plus to C/DR5. Fitch also placed three classes from three Ace transactions on Rating Watch Negative and affirmed the ratings on 28 other classes.

Eight classes from two issues of CitiMortgage Alternative Loan Trust mortgage pass-through certificates have been downgraded by Fitch Ratings.The downgrades were as follows: series 2006-A5 and 2006-A7, B2 classes, from A to A-minus; B3 classes, from BBB to BB-plus; B4 classes, from BB to B; and B5 classes, from B to CCC/DR2. Fitch also affirmed the ratings on four classes from the two transactions. The downgrades reflect deterioration in the relationship between credit enhancement and expected losses, the rating agency said. The collateral for the deals consists of fixed-rate alternative-A mortgage loans.

Ten classes of notes from Duke Funding High Grade II-S/EGAM I Ltd., which is linked to residential mortgage-backed securities, have been downgraded by Fitch Ratings as a result of reported events of default.Fitch said the proceeds of the notes were used to acquire a diversified portfolio of primarily floating-rate RMBS. The issuer provided notices of the following events of default: inability to make payments as required under a hedge agreement to an interest rate hedge counterparty; and failure to pay interest due on various classes of the notes. "The events of default have resulted from declines in the market value of the portfolio which have left the issuer unable to meet margin calls from repurchase counterparties," Fitch reported.

Eleven classes of Wells Fargo Asset Securities Corp. mortgage pass-through certificates have been downgraded by Fitch Ratings, and 30 classes have been placed on Rating Watch Negative.Fitch also affirmed the ratings on 324 classes from 54 Wells Fargo transactions. The negative rating actions reflect deterioration in the relationship between credit enhancement and expected losses, Fitch said. The collateral for the deals consists of fixed- and adjustable-rate prime mortgage loans. Fitch can be found on the Web at http://www.fitchratings.com.

When it comes to mortgage fraud, there are not many new ways to separate lenders and homeowners from their money. But there are sometimes new twists to old favorites.In a recent case of equity skimming, federal investigator Herschell Harvell Jr. found a group of 10-12 people who were running a foreclosure rescue scam. In an effort to save his home, and in return for the promise that the "investor gang" would bring his delinquent loan current, the troubled owner put all their names on the title and then paid the group rent while he continued to live in the property. Of course, the group didn't make any payments, but it did collect rent from the owner, Mr. Harvell told SourceMedia's Fraud and Risk Conference in Las Vegas Monday. Each time the lender started foreclosure proceedings, one of the group of con men filed for bankruptcy, according to Mr. Harvell, the assistant special agent in charge in the Department of Housing and Urban Development's Office of the Inspector General. And the day before a foreclosure hearing was scheduled, one con man would file for bankruptcy, delaying the proceedings. Then, the day before a hearing was scheduled, the con man would drop his bankruptcy claim and another one would file a new proceeding. The switch continued time and time again, according to the HUD official, while the owner went blindly along making his "rent" payments to the gang of charlatans. Mr. Harvell, who has successfully investigated numerous white-collar cases during his 11-year career at HUD, told the conference that despite lenders' best efforts to stop fraud, con men "continue to search for weaknesses in the system and take advantage of them."

Freddie Mac is charging higher guarantee and delivery fees in order to raise capital and increase earnings, the company's chairman and chief executive Richard Syron has told an investor conference."The way you want to get capital over the long run is by generating earnings," Mr. Syron said. "And we just plain were not generating enough earnings on the basis of the prices we were charging and the current risk environment." Freddie's fourth-quarter earnings are "not expected to be better than they were in the third quarter," he said, when the giant mortgage company reported a $2 billion loss. Freddie expects a 10% house price decline on properties financed with prime conforming mortgages, and it projects that the mortgages it guarantees will experience a 3.0%-3.5% default rate and a 30% severity rate. The average g-fee Freddie charged in the third quarter was in the mid-20s, up significantly from those of last year, Mr. Syron said. This business is "going to be very attractive" in the coming years, he added. The government-sponsored enterprise can be found on the Web at http://www.freddiemac.com.

After several false starts, the House Judiciary Committee is slated to mark up a bankruptcy bill on Wednesday that would allow homeowners filing for Chapter 13 relief to get their mortgages restructured.Committee Democrats have agreed to several changes to the bankruptcy bill (H.R. 3609) to secure the support of Rep. Steve Chabot, R-Ohio. As originally introduced by Reps. Brad Miller, D-N.C., and Linda Sanchez, D-Calif, H.R. 3609 would allow bankruptcy judges to reduce interest rates and the principal amount of a mortgage, which mortgage industry groups and several committee Republicans warned would scare off mortgage investors and damage the secondary market. Under the proposed changes, the bill would cover subprime and nontraditional mortgages that were originated after Jan. 1, 2000 up to the date of enactment of the legislation. The compromise also includes new criteria for homeowners who could qualify for bankruptcy relief.

A "tough" predatory lending bill that Sen. Christopher J. Dodd, D-Conn., planned to introduce Tuesday would impose a fiduciary duty on mortgage brokers and address lending, servicing, and appraisal abuses.Sen. Dodd's bill prohibits yield-spread premiums (which are a broker's main form of compensation) on subprime and nontraditional mortgages such as interest-only and payment-option adjustable-rate mortgages. Lenders would be responsible for faulty appraisals and be required to adjust the mortgage where an appraisal exceeds the market value by 10%. Servicers would be required to publicly report their loss mitigation activities under the bill, which also prohibits servicers from "pyramiding" late fees to generate additional income. Mortgage industry groups are expected to raise strong objections to the bill, which creates new lending standards but does not pre-empt state laws. Under the Dodd bill, homeowners with improperly underwritten loans can go directly to the holder of the mortgage (assignee) to seek a cure or rescission of their loan. Their attorneys can also seek $5,000 in statutory damages, but cannot pursue class actions against assignees. State attorneys general also have certain enforcement powers.

Tax preparation giant H&R Block lost $502 million in its fiscal second quarter, blaming the poor performance on its discontinued subprime unit, Option One Mortgage of Irvine, Calif.Block is now trying to sell Option One's $62.3 billion servicing business after a deal to sell the entire company to hedge fund giant Cerberus Capital fell apart. By discontinuing Option One's operations, Block took a total pretax loss of $551 million. Included in that number is a $252 million loss on the sale of $3 billion in whole loans. It also lost $123 million due to mortgage-related impairment charges tied to mortgage and servicing assets.

Washington Mutual, once a powerhouse in the mortgage industry, says it will trim 22% of its home loan staff, eliminate its subprime channel, and take a whopping $1.6 billion writedown in the fourth quarter.On Monday afternoon the nation's largest thrift also said it would raise $2.5 billion in new capital through a convertible preferred offering and slash its dividend by 73%. The Seattle-based WaMu said it remains committed to the mortgage business but noted that the industry is undergoing a "fundamental shift due to credit dislocation and a prolonged period of reduced capital markets liquidity." In total, it is eliminating 3,150 jobs, including 2,600 in its mortgage group. As previously reported, it is also closing its warehouse division. In response to the latest announcement, Fitch Ratings downgraded the long-term issuer default ratings of WaMu and Washington Mutual Bank from A to A-minus, and downgraded various other ratings of WaMu and its subsidiaries. In trading Tuesday morning, WaMu's stock was down 9% to $19.88 a share.