Servicing

If bankruptcy judges begin to reduce or "cram down" the principal amount of residential mortgages, Federal Housing Administration servicers would have to absorb the losses because the government cannot pay a claim on a cramdown, according to the Mortgage Bankers Association.Passage of the bankruptcy bill (H.R. 3609) to permits cramdowns and loan modifications would make it riskier for lenders to originate FHA-insured and Department of Veterans Affairs-guaranteed loans, MBA chairman-elect David Kittle warned a House Judiciary Committee panel. As a result, lenders would have to charge higher interest rates and fees. The MBA also noted that Fannie Mae and Freddie Mac would be required to purchase loans out of mortgage-backed securities pools if loans are modified. "If this bill becomes law, we believe mortgage rates would jump significantly, going up 1 1/2 to 2 points for everyone taking out a loan," Mr. Kittle told the commercial and administration law subcommittee. The association can be found on the Web at http://www.mortgagebankers.org.

Fitch Ratings also downgraded and withdrew five classes of notes from two Westways mortgage market value collateralized debt obligations.The downgrades were as follows: Westways Funding VII Ltd., class LD loan interests, from CC/DR5 to C/DR2, and income notes, from CC/DR6 to C/DR6; and Westways Funding VIII Ltd., class D, from CC/DR5 to C/DR5, class LD, from CC/DR5 to C/DR5, and income notes, from CC/DR6 to C/DR6. Both transactions had failed overcollateralization tests, and their portfolios were liquidated, Fitch reported. The asset portfolios contained floating-rate mortgage-backed securities, and agency securities constituted over half of each portfolio.

Fitch Ratings issued a flurry of rating actions Oct. 29 that included downgrades of 51 classes of mortgage-backed securities.Fitch also placed seven classes of MBS on Rating Watch Negative and affirmed the ratings on 67 classes. Among the securities affected by the downgrades were: 26 classes from six issues of Structured Asset Investment Loan mortgage pass-through certificates and 14 classes from three issues of Amortizing Residential Collateral mortgage pass-throughs. The negative rating actions were attributed chiefly to a deterioration in the relationship between credit enhancement and loss expectations, although one was linked to changes in Fitch's subprime loss forecasting assumptions. The rating agency can be found online at http://www.fitchratings.com.

The default rate on subprime mortgage loans jumped nearly 150 basis points in August to a record high of 16.1%, and the foreclosure rate jumped 82 bps to 6.8%, as declining house prices began to take their toll on credit performance, according to a Friedman Billings Ramsey Investment Management report.Michael Youngblood, FBRIM's managing director of fixed-income research, notes that falling house prices are becoming a factor in the latest surge in subprime defaults. The researcher points out that 49 metropolitan statistical areas in six states, representing 46% of all subprime loans, have experienced a 200% or more increase in defaults since August 2006. "Furthermore, we count 43 housing price bubbles in these 49 MSAs, whereas we count only 69 house price bubbles in all 363 MSAs," Mr. Youngblood says in the report. The report also indicates that the default rate on alternative-A loans jumped 62 bps to 3.96% in August, and the foreclosure rate rose 41 bps to 1.96%. (The default rate includes loans 90 days or more past due, in foreclosure, and real estate owned.)

Office of Thrift Supervision economists see a "high" probability of continued housing market deterioration, along with rising foreclosures and house price declines, according to the premier issue of the agency's Monthly Market Monitor."The probability of further deterioration in housing conditions remains high, leaving asset prices vulnerable to more declines and credit spreads susceptible to greater widening," the OTS report says. The monthly report also seems to warn thrifts that they could be facing a "prolonged" correction in the housing market. "Contributing to the malaise is higher mortgage rates and tighter credit conditions as lenders, saddled with loans on balance sheets, have fewer funds to lend and less desire to extend credit to other-than-prime borrowers," the Oct. 26 monitor says.

Smarting from a $7.9 billion writedown related to subprime and collateralized debt obligation assets, Merrill Lynch & Co. on Tuesday announced the "immediate" retirement of chairman and chief executive Stanley O'Neal.Mortgage bankers that have done business with Merrill Lynch say Mr. O'Neal is being blamed, in part, for the Wall Street giant's foray into the subprime market. About a year ago, according to one banker, Merrill had about $10 billion in outstanding warehouse lines of credit or repos with subprime nondepositories. Merrill Lynch has elected director Alberto Cribiore as its interim nonexecutive chairman. He will spearhead Merrill's search for a new CEO.

Six classes of Banc of America Funding Corp. mortgage pass-through certificates, series 2006-D, have been downgraded by Fitch Ratings.The downgrades were as follows: class 1-M-4, from A to BBB-plus; class 1-M-5, from BBB-plus to BB; class 1-M-6, from BBB-minus to B; class X-B-3, from BBB to BBB-minus; class X-B-4, from BB to B-plus; and class X-B-5, from B to C/DR4. In addition, Fitch placed classes 1-M-2, 1-M-3, 1-M-4, and 1-M-5 on Rating Watch Negative and affirmed the ratings on 15 other classes in the deal. The negative rating actions were attributed to a deterioration in the relationship between credit enhancement and loss expectations.

Seven classes from two Harborview Mortgage Loan Trust Inc. securitizations have been downgraded by Fitch Ratings and one has been placed on Rating Watch Negative.The downgrades were as follows: series 2006-4, class B-7, from A-minus to BBB, class B-8, from BBB-plus to BBB-minus; class B-9, from BBB to BB, and class B-11, from B to CC/DR4; and series 2006-6, class B-3, from BBB to BBB-minus, class B-4, from BB-minus to B, and class B-5, from CCC/DR2 to C/DR5. Class B-2 of series 2006-6 was placed on Rating Watch Negative, and class B-3 was removed from Rating Watch Negative. In addition, Fitch affirmed the ratings on nine other classes in the two transactions. The rating agency attributed the negative rating actions to a deterioration in the relationship between credit enhancement and loss expectations. The deal is backed by adjustable-rate mortgage loans secured by first liens on residential properties.

Ten classes from two Wells Fargo home equity asset-backed securities have been downgraded by Fitch Ratings as a result of changes in the rating agency's subprime loss forecasting assumptions.Fitch also affirmed the ratings on 19 other classes in three Wells Fargo deals. The revised assumptions in Fitch's subprime loss model "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness," the rating agency said.

Twenty classes of Residential Accredit Loan Inc. mortgage securities have been downgraded by Fitch Ratings, and four classes have been placed on Rating Watch Negative.In addition, Fitch affirmed the ratings on 40 classes from 10 RALI securitizations and removed three classes from Rating Watch Negative. The negative rating actions were attributed to a deterioration in the relationship between credit enhancement and loss expectations. The collateral for the deals consists primarily of 15- and 30-year fixed-rate mortgage loans extended to alternative-A borrowers, the rating agency said.