Servicing

The deterioration in the credit quality of subprime mortgages could result in losses ranging from $50 billion to $100 billion, Federal Reserve Board chairman Ben Bernanke told Congress July 19.The chairman indicated that delinquencies and foreclosures are rising faster than the Fed anticipated only a few months ago. And these problems "likely will get worse before it gets better," he said. Mr. Bernanke also told the Senate Banking Committee that he expects the Fed to issue new Home Ownership and Equity Protection Act regulations to address certain subprime lending practices, such as prepayment penalties, later this year. When asked about Federal Housing Administration reform, the Fed chairman advised the Senate to act cautiously because FHA single-family loans have high delinquency and default rates. "I would suggest moving with some caution to ensure you don't create another source of problems," Mr. Bernanke testified.

"We have a long way to go" in the subprime mortgage crisis, Countrywide chairman Angelo Mozilo told attendees in keynote remarks July 18 at the 35th Annual Western Secondary Market Conference in San Francisco.Pouring cold water on statements by other mortgage executives, including Countrywide Financial Corp.'s own Todd Dal Porto, Mr. Mozilo said the current subprime collapse is causing a paradigm shift that will bring down an avalanche of regulatory scrutiny. While declining to point blame for the subprime collapse in any particular direction, he said, "The Street stepped up to provide liquidity irrespective of underwriting" as New Century and others "went to the market time after time to get more capital" for exotic loans. The mortgage industry itself will be the real victim, Mr. Mozilo said.

The residential primary servicer rating for subprime product and the residential special servicer rating of Option One Mortgage Corp. have been placed on Rating Watch Negative by Fitch Ratings.The company's primary servicer rating is RPS1, and its special servicer rating is RSS1. (Fitch rates residential servicers on a scale of 1 to 5, with 1 being the highest rating.) Fitch said the actions reflect "the potential impact on Option One's servicing platform of decreased loan originations, changes in credit lines, as well as uncertainties regarding the sale of the servicing platform." The rating agency noted that H&R Block announced in April that Option One's servicing platform would be purchased by Cerberus Capital Management LP. "In light of challenges facing the subprime market, including the increased cost of servicing defaulted subprime loans, as well as Option One's transitioning from a publicly rated parent to an unrated nonpublic company, there are concerns regarding the company's ability to sustain its operational capabilities," Fitch said.

The B-4 classes from NAAC Reperforming Loan Remic Trust Certificates series 2004-R1 and 2004-R2 have been placed under review for possible downgrade by Moody's Investors Service.The negative rating actions were taken because credit enhancement levels are low given the projected losses on the underlying pools, Moody's said. The transactions consist of securitizations of reperforming loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, nearly all of which were repurchased from Ginnie Mae pools, according to the rating agency.

Four classes of First Horizon Home Loan Mortgage Trust mortgage-backed securities have been downgraded by Fitch Ratings and three classes have been placed on Rating Watch Negative.The downgrades were as follows: series 2006-AA3, class B4, from BB to B-plus, and class B5, from B to CCC/DR1; and series 2006-FA2, class B4, from BB to B-plus, and class B5, from B to CCC/DR2. Class B3 of series 2006-AA3 and classes B3 and B4 of series 2006-FA2 were placed on Rating Watch Negative. The negative rating actions were attributed to deterioration in the relationship between credit enhancement and expected losses. The collateral for the transactions consists of conventional fixed- and adjustable-rate mortgages secured by first liens on residential properties. Fitch can be found online at http://www.fitchratings.com.

Moody's Investors Service has placed under review for possible downgrade 66 tranches from 33 residential mortgage-backed securities deals backed primarily by first-lien alternative-A mortgage loans.The rating actions, affecting securities with an original face value of approximately $318 million, were based on higher-than-expected loan delinquency rates and pool losses, Moody's said. The deals have not experienced significant losses to date, but Moody's said credit enhancement may be low in view of the amount of loans in foreclosure and held as real estate owned. "Moody's has noted a negative trend in delinquencies for first-lien, alt-A mortgage loans originated in late 2005 and 2006," the rating agency said, citing data indicating that they have higher-than-expected delinquency rates. The loans were originated in an environment of "aggressive underwriting" that contributed to significant deterioration in loan performance, Moody's said. Half of the tranches placed under review, 33, come from 11 deals issued by CWABS Asset-Backed Certificates Trust and CWALT Inc. Mortgage Pass-Through Certificates, and 13 come from eight deals issued by Bear Stearns Alt-A Trust and Bear Stearns Asset Backed Securities I Trust, Moody's reported.

Freddie Mac has announced the pricing of $500 million of fixed-rate noncumulative perpetual preferred stock.The 20 million shares of preferred stock (CUSIP: 313400657) are being offered at $25 per share with a dividend rate of 6.02%, the government-sponsored enterprise said. The GSE will have the option to redeem all or part of the shares on or after June 30, 2012, at $25 per share plus accrued dividends. The stock is being offered via a syndicate of six dealers. Freddie Mac can be found online at http://www.freddiemac.com.

Standard & Poor's Ratings Services has placed 68 classes from 19 collateralized debt obligations with exposure to recently downgraded subprime residential mortgage-backed securities on CreditWatch with negative implications.The actions followed S&P's July 12 downgrades of numerous classes from first-lien subprime RMBS transactions. S&P said it has reviewed the results of preliminary cash flow analyses for the CDOs and compared them with scenario default rates generated by its CDO Evaluator model to determine whether the credit enhancement is still adequate. The CreditWatch placements "reflect the increased probability of default within the overall portfolios and take into consideration the CDO structures and the rating cushions available to support each tranche," S&P said. The rating agency can be found online at http://www.standardandpoors.com.

Interactive communications specialist Varolii Corp. has announced that BOK Mortgage, a division of $18 billion multibank holding company BOK Financial, is now using Varolii's interactive collections system to reduce its mortgage delinquency ratio.Since adding Varolii to its mortgage collections process, BOK Mortgage has realized a 12% reduction in its mortgage delinquency ratio, according to the announcement. BOK Mortgage leverages the Varolii platform to automate much of the communications process around early-stage delinquencies, enabling the company to focus its contact center resources on more complex, high-priority accounts. Seattle-based Varolii can be found online at http://www.varolii.com, and BOK Financial can be found at http://www.bokf.com.

NovaStar Financial Inc., a mortgage lender based in Kansas City, Mo., has announced an equity investment of $48.8 million by MassMutual Capital Partners LLC and funds managed by Jefferies Capital Partners IV LLC, as well as commitments under which a shareholder rights offering will raise an additional $101.2 million.The transactions, which represent the end of the exploration of strategic options by NovaStar's board of directors, were accompanied by a four-for-one reverse stock split of NovaStar's common stock. The equity investment came in the form of the purchase of $48.8 million of convertible preferred stock, and MassMutual and Jefferies committed to buy up to $101.2 million of any unsubscribed shares of the forthcoming shareholder rights offering for a similar series of preferred stock, NovaStar said. "These steps will strengthen our financial position and establish NovaStar as one of the leading independent lenders and portfolio managers in the nonconforming mortgage sector," said Scott Hartman, chairman and chief executive officer of NovaStar. The company can be found online at http://www.novastarmortgage.com.