Servicing

Moody's Investors Service has announced the downgrading of $33.4 billion of securities issued in 2006 and backed by subprime first-lien mortgages, representing 7.8% of the original dollar volume of such securities rated by Moody's.Of the downgraded securities, $3.8 billion remain on review for further downgrade. In addition, another $23.8 billion of first-lien residential mortgage-backed securities were placed on review for downgrade. Moody's also affirmed the ratings on $258.6 billion of Aaa-rated securities and $21.3 billion of Aa-rated securities. "Today's rating actions incorporate Moody's long-range views regarding the performance of the deals in question," the rating agency said. "As a result, Moody's expects less future rating volatility for 2006 first-lien RMBS as long as home price depreciation remains less than 10% from peak to trough and the current economic environment remains stable." Among the factors underlying the Moody's analysis are the assumption that the severity of loss associated with loans that are now seriously delinquent will be 40%-50% on average, and that (based on a recent survey of subprime loan servicers) significant loan modifications that might mitigate future losses are unlikely in the near term.

Nine Wall Street dealers plan to invest $180 million in Thomson Financial's TradeWeb platform, which handles mortgage-backed securities trades as well as other fixed-income and derivative deals.The dealers that have agreed to buy a minority stake and participate in TradeWeb are: Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, The Royal Bank of Scotland, and UBS. Thomson and the dealers also separately agreed to fund an expansion of the platform.

The Office of Federal Housing Enterprise Oversight is proposing to correct its loss severity calculations for mortgage defaults, which could substantially increase Fannie Mae's and Freddie Mac's risk-based capital requirements.Under the current equations, the government-sponsored enterprises record profits, instead of losses, on foreclosures of government-guaranteed loans and loans with low loan-to-value ratios. These changes would have increased Fannie's RBC requirement by $7.5 billion to $9.8 billion in the fourth quarter of 2006 and Freddie's by $4.5 billion to $5.4 billion. Fannie exceeded its RBC requirements by $16.1 billion that quarter and Freddie exceeded it by $21.4 billion. If finalized, this rule would negate any benefits the two GSEs expect when OFHEO releases them from the requirement to maintain a 30% capital surplus, according to Federal Financial Analytics, a Washington consulting firm. The regulator is expected to roll back the capital surcharge when the GSEs return to timely financial reporting next year. There is a 90-day comment period on the proposal.

An internal investigation by Beazer Homes USA has found that its mortgage unit violated Federal Housing Administration rules, "particularly in relation to downpayment assistance programs," and a possible settlement with regulators could range from $8 million to $15 million, according to the Atlanta homebuilder.The violations of Department of Housing and Urban Development rules by Beazer Mortgage Corp. date back to "at least 2000," the company said, but it did not disclose the number of FHA loans involved or the default rates on those loans. A spokesman for the HUD inspector general's office declined to comment on the Beazer investigation. The homebuilder previously disclosed that the U.S. attorney's office in Charlotte, N.C., had subpoenaed its mortgage banking unit for loan production documents. Beazer also faces civil litigation from homebuyers who lost their homes. Fitch Ratings -- citing the Beazer internal probe, accounting irregularities, and "challenging" market conditions -- downgraded Beazer's issuer default rating and its senior notes from BB to BB-minus. The ratings remain on Rating Watch Negative. Beazer can be found online at http://www.beazer.com.

House Financial Services Committee Chairman Barney Frank, D-Mass., has drafted a bill that temporarily increases the caps on Fannie Mae's and Freddie Mac's portfolios for six months so the two mortgage giants can purchase modified or refinanced subprime loans.The bill would increase the caps on the companies' $700 billion portfolios by 10%, but 85% of any mortgages purchased must benefit struggling subprime borrowers. Sen. Charles E. Schumer, D-N.Y., is expected to introduce a similar bill in the Senate. "The six month/85% bill that I am filing seems to me responsive to the immediate needs to help people avoid foreclosure," Rep. Frank said. The House committee chairman is also preparing to introduce a bill aimed at stopping abusive lending practices. And he is planning to hold hearings on and mark up the predatory lending bill this year. The committee can be found online at http://financialservices.house.gov.

Six classes of notes issued by Duke Funding XIII Ltd., a collateralized debt obligation based largely on subprime residential mortgage-backed securities, have been placed on Rating Watch Negative by Fitch Ratings.The affected securities are classes A1J, A2S, A2J, A3, B1, and B2. The negative rating actions resulted from collateral deterioration, as 8.7% of the portfolio has been downgraded or placed under review for possible downgrade by at least one rating agency, Fitch reported. The hybrid structured finance CDO consisted, at closing, of 91.4% credit default swaps referencing chiefly subprime residential mortgage-backed securities, the rating agency said. Fitch can be found on the Web at http://www.fitchratings.com.

The Federal Housing Finance Board has finalized a cease-and-desist order that will prevent all stock redemptions at the Federal Home Loan Bank of Chicago without the FHFB's approval.The C&D order also requires the Chicago FHLBank to start phasing out the use of $1 billion in subordinated debt as capital after three years. "The action was necessary to improve the condition and practices of the bank, stabilize its capital" and address certain "supervisory concerns," the Finance Board said. In a letter to members, Chicago FHLBank president Mike Thomas acknowledged that the bank may have to make some changes in its operations. "As the issues in the order are addressed, the board and staff of the bank will continue their work to advance the mission of the bank and to explore appropriate strategic alternatives, including the possibility of a merger with the Federal Home Loan Bank of Dallas," Mr. Thomas said. The Finance Board can be found online at http://www.fhfb.gov, and the Chicago FHLBank can be found at http://www.fhlbc.com.

Lots of new real estate owned inventory will be coming into the market during the rest of 2007 and into 2008, and it will be tough to unload them, economist Christopher Thornburg has told attendees at the REOMAC Fall Conference in Hollywood, Fla."Cut the prices on these homes and sell them now, because it will be hard to get them off your books," said Mr. Thornburg, who is a founding partner of Beacon Economics. The peak of adjustable-rate mortgage resets will occur in mid-2008 and there will be a first-quarter recession, he predicted. The credit crisis is not over and real estate prices will fall 20% before the worst is over, Mr. Thornburg said. The commercial sector will be hit next, as the retail and office sector are not looking well. Mr. Thornburg told the crowd that Congress is looking into three bills to change the bankruptcy law and get rid of foreclosures. If these bills are approved, a bankruptcy judge would take control of the borrower's house and other assets and rewrite the borrower's mortgage. Borrowers who took out loans during the last three years would qualify under these laws, he said.

More than 223,000 foreclosure filings were reported nationwide in September, down 8% from the level recorded in August but up 99% from that of a year earlier, according to RealtyTrac, an online foreclosure marketplace based in Irvine, Calif.The nation's foreclosure rate stood at one foreclosure filing for every 557 households, the company said in its September 2007 U.S. Foreclosure Market Report. (Foreclosure filings include default notices, auction sale notices, and bank repossessions.) "U.S. foreclosure activity experienced a fairly broad-based retreat in September, with 39 states reporting decreasing activity and national numbers down in all foreclosure categories -- defaults, auctions, and bank repossessions," said James J. Saccacio, chief executive officer of RealtyTrac. "Nevertheless, it's important to note that September's total was still the second-highest monthly total we've seen since we began issuing our report in January of 2005." The company said Nevada, Florida, and California recorded the highest foreclosure rates in September. The company can be found online at http://www.realtytrac.com.

Countrywide Financial Corp., Calabasas, Calif., had a 1.27% foreclosure rate on its servicing portfolio at the end of September, a 149% increase from that of the same period last year.According to September operational figures released by the company, Countrywide serviced $1.459 trillion worth of loans at Sept. 30, which means $18.5 billion worth of mortgages it services are in the "foreclosures pending" category. Roughly 5.85% of its servicing portfolio is delinquent. Countrywide funded $21 billion in loans in September, a 44% decline from the level recorded in September 2006. It also saw its employee headcount fall by 4,935 during the month, most of it, presumably, due to layoffs. The company can be found online at http://www.countrywide.com.