Servicing

In restocking its portfolio, Freddie Mac agreed to purchase $40.4 billion in mortgage assets in June -- its largest mortgage purchase commitment in four years.The mortgage giant has allowed its portfolio to shrink since entering into a voluntary agreement with its regulator last August to cap the portfolio until its accounting systems and internal controls are fixed. Freddie Mac's monthly volume report for June shows that the portfolio could hold another $21.3 billion in mortgage assets and still be in compliance with the $724.5 billion cap, which is calculated quarterly under generally accepted accounting principles. "We have plenty of room to grow," Freddie spokesman Michael Cosgrove said. The retained portfolio grew at a 1.2% annual rate in June to an unpaid principal balance of $712.1 billion. Freddie also reported that it issued $232.4 billion in guaranteed mortgage securities during the first six months of this year, compared with $185.5 billion in the last half of 2006. Freddie Mac can be found online at http://www.freddiemac.com.

U.S. banking regulators have agreed to kick the Basel Ia risk-based capital proposal aside and give regional and community banks the option of using the "standardized" RBC approach, which many foreign banks have adopted."We are pleased with the recognition of the importance of the standardized approaches, particularly that they offer more flexibility than the earlier Basel Ia proposal," said Wayne Abernathy, executive director of the American Bankers Association. While the largest and most internationally active U.S. banks will move ahead with implementation of the Basel II "advanced" RBC approach, the federal regulators were silent in regard to allowing small banks to continue to operate under the current Basel I rules. But most observers doubt that the regulators would force the small banks to adopt the more complex standardized approach, which has more gradients of risk than Basel I, plus an operational risk component. ABA senior economist Robert Strand noted, however, that some banks strongly supported Basel Ia because of the improvements in the risk weights for residential mortgages. "We will ask that those improvements be allowed as an option under Basel I," he said.

Seventeen tranches from eight transactions of U.S. cash-flow and hybrid collateralized debt obligations of asset-backed securities have been placed on CreditWatch with negative implications by Standard & Poor's Ratings Services.The actions followed the downgrade of 418 classes of U.S. residential mortgage-backed securities backed by closed-end second-lien mortgage collateral. The exposure of the CDOs placed on CreditWatch to the downgraded RMBS ranges from 6.6% to 14.2% of collateral assets, S&P said. All but one of the affected CDOs were issued during 2006. Two of the eight are high-grade structured finance CDOs of ABS (collateralized at origination primarily by AAA, AA, and up to 30% A rated tranches of RMBS and other structured-finance securities), and the remaining six are mezzanine CDOs of ABS, collateralized largely by A and BBB rated tranches of RMBS and other structured-finance securities, the rating agency said.

Hanscom Family Housing LLC's taxable military housing revenue bonds series 2004A and 2004B have been downgraded by Standard & Poor's Ratings Services and placed on CreditWatch developing due to projected weak debt service coverage.Series 2004A was downgraded from AA to BBB-plus, and series 2004B was downgraded from A to BB. Although debt service coverage for Hanscom is "significantly strong," there are factors that may cause the coverage to weaken, the rating agency said. The factors are: negligible increases in the military's Basic Allowance for Housing over the past several years; lower-than-expected net operating income, due to construction delays; and diminished capitalized interest in 2007, which was a source of revenue eligible to pay debt service. S&P can be found online at http://www.standardandpoors.com.

Members of the Federal Home Loan Bank of New York will receive a 7.5% cash dividend, which represents a 97.7% payout ratio from the bank's second-quarter earnings."The dividend reflects the Bank's low-risk profile and conservative investment strategy," president Alfred DelliBovi says in a letter to shareholders. The New York FHLBank posted second-quarter earnings of $70.6 million, down 6.4% from that of the same period a year ago. And the dollar amount of the dividend is "approximately $69 million," the letter says. The $85.9 billion-asset FHLBank has $4 billion capital and $311 million in retained earnings.

Federal regulators and mortgage lenders were "largely responsible" for the housing and mortgage crisis, which should be remedied by better enforcement of predatory-lending statutes and the adoption of "suitability" requirements and federal licensing standards for lenders, according to a white paper by Weiss Research Inc.The white paper, submitted to the Federal Reserve Board July 19, argues that the crisis is likely to worsen and that the Fed played a role in "further inflating the housing bubble that's at the root of the current crisis." Mike Larson, Weiss's interest rate and real estate analyst and the author of the report, also points the finger at lenders who "debased their standards" rather than accept a decline in lending volume, and at Wall Street, whose "large-scale transformation of mortgages into securities significantly boosted risk-taking." Among other things, the report calls for assignee liability for the secondary market and closer monitoring and prompter action by the Fed to "help avert runaway asset price inflation." Weiss, based in Jupiter, Fla., can be found online at http://www.weissgroupinc.com.

Six certificates of three deals issued by CWABS Asset-Backed Securities Trust have been downgraded by Moody's Investors Service.The downgrades were as follows: series 2002-BC3, class M-2, from A2 to Baa1, and class B-1, from Baa2 to B3; series 2003-BC6, class M-5, from Baa2 to Ba1, and class B, from Baa3 to Ba3; and series 2004-AB1, class M-4, from A3 to Baa3, and class B, from Baa2 to B1. The actions were based on an "analysis of the credit enhancement provided by subordination, overcollateralization, and excess spread relative to expected losses," Moody's said.

Bank of America Corp., Charlotte, N.C., has reported net income of $5.76 billion ($1.28 per share) for the second quarter, an increase of 5% from $5.48 billion ($1.19 per share) a year earlier, though its mortgage-related earnings declined.BoA said the net income from its Consumer Real Estate segment, including its home equity and mortgage businesses, fell 18% to $141 million "because of higher provision expense from increased loss expectations in the home equity portfolio, reflecting the growth of this business." Revenues for the segment totaled $856 million, a 22% increase, the company said. BoA can be found online at http://www.bankofamerica.com.

Washington Mutual Inc., Seattle, has reported net income of $830 million ($0.92 per share) for the second quarter, up from $767 million ($0.79 per share) a year earlier, although its Home Loans group recorded a net loss.The Home Loans group took a loss of $37 million in the second quarter, compared with a net loss of $113 million in the first quarter and net income of $50 million a year earlier, WaMu said. "Net losses from the sales of subprime mortgage loans and adjustments to reflect changes in market values of loans held for sale totaled $38 million, which was a substantial improvement from net losses of $164 million in the first quarter," the company said. Prime mortgage volume rose 7% in the second quarter, while subprime mortgage production declined 30% from that of the first quarter. WaMu can be found online at http://www.wamu.com.

Standard & Poor's Ratings Services has downgraded 418 classes of securities that are backed by U.S. closed-end second-lien mortgage collateral and were issued from January 2005 through January 2007.The rating actions, involving residential mortgage-backed securities with an original balance of approximately $3.8 billion, resolved 229 CreditWatch actions taken since Oct. 6, 2006, S&P reported. Over 100 of the downgraded classes had previously been downgraded, S&P said. The rating agency said it took the actions "because it believes that losses on U.S. RMBS backed by closed-end second-lien collateral will significantly exceed historical precedent and our original assumptions." The poor performance was attributed to various factors, including looser underwriting standards; pressure on home prices; speculative borrowing; risk layering (combining several risk elements for one borrower); very high combined loan-to-value ratios; financial pressure resulting from payment increases on first-lien mortgages; and questionable data quality. "Furthermore, in the past, when borrowers had difficulty managing their mortgage payments, they were able to refinance," S&P noted, something that tighter underwriting standards, higher interest rates, and home price erosion will make more difficult.