Servicing

The Mortgage Bankers Association has released a policy paper that distinguishes the issue of mortgage fraud from predatory lending and discourages adding to or modifying the "already comprehensive" list of federal fraud statutes.The MBA's policy paper, Mortgage Fraud: Strengthening Federal and State Mortgage Fraud Prevention Efforts, recommends that Congress increase the resources available to law enforcement and help facilitate the coordination of federal and state law enforcement of financial crimes. "We do not need more federal laws to combat fraud," said Jonathan L. Kempner, president and chief executive officer of the MBA. "Instead, we need a more coordinated effort and more resources to investigate and prosecute. In addition to being illegal and costly, we know that fraud has also contributed to the recent rise in delinquencies and foreclosures, and the industry and government must step up our anti-fraud efforts to help curtail these related problems." The FBI has estimated that fraud cost mortgage lenders as much as $4.2 billion in 2006. The MBA can be found online at http://www.mortgagebankers.org.

Citigroup said Monday that it would take a $1.3 billion pretax charge on the value of subprime mortgage securities that are part of current collateralized debt obligations or that are warehoused for inclusion in future CDOs.The subprime-related charges also cover collateralized loan obligations, or CLOs. Additionally, Citi will take a $1.4 billion charge on what it calls "unfunded highly leveraged finance commitments." These writedowns -- and others -- will be taken when Citigroup reports third-quarter results. The banking giant blamed the writedowns on "dislocations" in the mortgage-backed security and credit markets. It estimates that its third-quarter earnings might fall by as much as 60% because of these and other charges. The company can be found online at http://www.citigroup.com.

The Office of Thrift Supervision has closed NetBank in Alpharetta, Ga., after the $2.5 billion thrift sustained "significant losses" in its mortgage banking business and was unsuccessful in completing a private sale.NetBank, which opened as an Internet bank in 1997, is still solvent, but the OTS said the depository had no remaining prospects for raising capital or achieving profitability. "While the institution continued to operate in excess of minimum capital standards, the actions taken to address these problems were unsuccessful and it became clear that high operating expenses combined with continuing losses were jeopardizing the institution's viability," the regulator said. As the receiver, the Federal Deposit Insurance Corp. has arranged for ING Bank, Wilmington, Del., to assume the insured deposits. The Internet bank had $109 million in uninsured deposits, and those depositors will become creditors of the receivership. Meanwhile, EverBank, Jacksonville, Fla., has agreed to purchase $700 million in mortgages and the FDIC will retain $1.1 billion in assets. The FDIC says it expects the bank failure to cost the Deposit Insurance Fund $110 million.

Class M-3 of FNBA Mortgage Loan Trust 2004-AR1 has been placed on review for possible downgrade by Moody's Investors Service.The rating action was attributed to credit enhancement levels that are deemed to be low given the projected losses on the underlying pools. "The pool of mortgages has seen a spike in losses in recent months, and future losses could cause a more significant erosion of the overcollateralization," Moody's said. The transaction consists of alternative-A first-lien hybrid adjustable-rate loans.

Two classes of notes issued by Enhanced Mortgage-Backed Securities IV Ltd., a mortgage market value collateralized debt obligation, have been downgraded by Fitch Ratings.Class A-4 was downgraded from BB-minus to B, and preference shares were downgraded from B-minus to CCC/DR5. Both classes remain on Rating Watch Negative, and class A-2 from the deal was placed on Rating Watch Negative. The downgrades were attributed to concerns about the proceeds that are likely to result from the sale of assets in view of current price volatility. The watchlist placement was based on Fitch's view that breaches of the transaction's overcollateralization tests "may occur in the near future," the rating agency said. The collateral of the CDO consists of mortgage- and asset-backed securities, other CDOs, and agency obligations.

Five classes of notes issued by Delphinus CDO 2007-1 Ltd., a collateralized debt obligation consisting largely of residential mortgage-backed securities, have been placed on Rating Watch Negative by Fitch Ratings.The affected securities are classes C, D-1, D-2, D-3, and E. Fitch also affirmed the ratings on eight other classes in the transaction. The negative rating actions were attributed to deterioration in collateral credit quality. The deal has a revolving portfolio, of which RMBS constitute 88.9%, commercial MBS constitute 0.6%, and structured finance CDOs constitute 6.75%, Fitch reported. It consists primarily of 2006 and 2007 vintage subprime collateral. The rating agency can be found online at http://www.fitchratings.com.

Seven subprime certificates from Meritage Mortgage Loan Trust 2004-1 and 2004-2 have been placed under review for possible downgrade by Moody's Investors Service.The affected classes are as follows: series 2004-1, classes M-4, M-5, M-6, M-7, and M-8; and series 2004-2, classes M-9 and M-10. The rating actions were taken because "credit enhancement provided by subordination, overcollateralization, and excess spread for each deal is low compared to the projected pipeline losses of the underlying pool," Moody's said. Both transactions are backed by first- and second-lien fixed- and adjustable-rate subprime mortgage loans originated by Meritage Mortgage Corp.

Moody's Investors Service has downgraded the servicer quality rating of EMC Mortgage Corp. as a primary servicer of subprime residential mortgage loans from SQ1 to SQ1-minus.Moody's also affirmed EMC's SQ2 rating as a primary servicer of prime residential mortgages (including alternative-A), its SQ2 rating as a primary servicer of second-lien residential mortgages, and its SQ2-plus rating as a special servicer. The downgrade was prompted by "the high level of volatility that has been experienced in the subprime market as well as a reduction from strong to above average in Moody's assessment of the company's foreclosure and REO timeline management," the rating agency said. EMC is a wholly owned subsidiary of The Bear Stearns Cos. Its servicing operations are based in Lewisville, Texas. Moody's can be found online at http://www.moodys.com.

The House Ways and Means Committee has passed a bill that removes tax penalties for homeowners involved in a mortgage restructuring or foreclosure and extends for seven years a deduction for mortgage insurance premiums."Families dealing with the pain of foreclosure should not have the double-whammy of a large tax bill for terminating their mortgage through no fault of their own," said Rep. Charles B. Rangel, D-N.Y., the committee chairman. The Bush administration proposed temporary relief from paying taxes on the forgiveness of debt, but the provision in the committee bill (H.R. 3648) is a permanent exclusion. So far, its does not appear that the White House will oppose the bill. Families with incomes of $100,000 or less who refinanced or purchased a home in 2007 can deduct the cost of their mortgage insurance premium. But this deduction is due to expire at the end of the year. By going with a seven-year extension, the House tax writers signaled that it is not appropriate to extend the MI deduction one year at a time, like many other provisions in the tax code.

Twenty-five classes of notes and loan interests issued by Westways Funding VI, VII, VIII, IX, and XI mortgage market value collateralized debt obligations have been downgraded by Derivative Fitch.In addition, 14 classes from the CDOs have been placed on Rating Watch Negative. The negative rating actions were attributed to "uncertainty in the proceeds that will be achieved during a possible forced sale of assets given the price volatility that even highly rated securities have seen in the current market environment." Fitch can be found on the Web at http://www.derivativefitch.com.