Servicing

The Bear Stearns hedge fund "debacle" strengthens the argument that issuers of subprime mortgage securities should have some liability for the underwriting of loans they securitize, according to House Financial Services Committee Chairman Barney Frank, D-Mass.This past week, Merrill Lynch liquidated roughly $850 million in subprime-related assets it had seized from at least one Bear hedge fund after the fund failed to meet its margin calls. Bear Stearns -- after being pressured by other creditors -- is moving to shore up the hedge fund (and a second fund) to prevent a liquidation. Industry groups contend that assignee liability would "kill" the subprime securitization market. In an interview on public television's Nightly Business Report, Rep. Frank said, "But that market is dying of its own right now." He added that including a reasonable assignee liability provision in a predatory-lending bill would provide purchasers of subprime securities a "degree of confidence" that the issuer has vetted the loans. The congressman said he hopes to complete a draft of his predatory-lending bill before the August recess and hold hearings on it in the fall.

Chase has announced plans to expand its subprime bulk program later this year to include a flow process and has hired mortgage banker Rick Boyd to manage the new flow effort.Mr. Boyd has been named subprime flow manager at the company as part of its correspondent lending division, responsible for all program coordination, including risk and capital markets, operations, sales, and marketing. Chase originates $170 billion in residential mortgages and home equity annually -- including nearly $100 billion through the wholesale, correspondent, and correspondent-negotiated channels -- and services a portfolio of more than $500 billion.

Standard & Poor's Ratings Services is requesting comments on its proposed guidelines on the loan modification practices of residential mortgage loan servicers.S&P is also seeking comment on the manner of reimbursement of capitalized loan amounts in U.S. residential mortgage-backed securities. "The framework outlined in the proposal provides the market with a transparent, consistent, and fundamentally sound way of assessing loan modification and capitalization reimbursement amount risks in U.S. RMBS transactions," S&P said. The rating agency noted that loans can be modified by extending the amortization terms, adding balloon payments, decreasing the mortgage rates, and forgiving principal or interest payments, among other things. "The proposed guideline changes reflect the potential increase in the use of loan modifications as a loss mitigation strategy in the mortgage loan servicing industry and encourage sound loan modifications," the rating agency said. The guidelines can be found on S&P's website at http://www.standardandpoors.com.

Subprime borrowers are more likely to be 30 days or more late on their mortgage payments than on their unsecured credit card obligations, a "significant departure" from historical consumer behavior, according to an Experian study on the subprime lending market.Historically, consumers have paid mortgage debt over bankcard debt, so the finding "represents a significant departure from conventional behavior," the Costa Mesa, Calif.-based Experian said. Subprime borrowers were defined as those with an Experian credit score of 620 or lower. Borrowers with prime credit scores of over 680 continued to follow the traditional pattern of paying mortgage debt before credit card debt, the information services company reported. "The current marketplace debate and increased visibility on subprime lending led us to examine historical consumer payment trends to see if they have shifted," said Kerry Williams, president of Experian Information Solutions. "Interestingly, our data revealed that many consumers in the subprime segment have adjusted their payment patterns in order to better manage their personal finances." Experian can be found online at http://www.experiangroup.com.

Merrill Lynch & Co., New York, has seized roughly $800 million in subprime-related assets from at least one Bear Stearns hedge fund and has begun liquidating those assets after margin calls on the fund were not met, investment banking sources have confirmed to MortgageWire.At deadline time, Bear's spokesman had not returned a telephone call about the matter. Merrill declined to comment. Bear Stearns operates two hedge funds -- the High-Grade Structured Credit Strategies Enhanced Leverage Fund, and the High-Grade Structured Credit Strategies Fund -- that have investments in subprime-related assets, including long positions on the ABX Index, sources said. Last winter MW broke the news that Merrill Lynch's warehouse lending group was making margin calls on certain subprime firms, some of which later filed for bankruptcy protection. The companies can be found online at http://www.ml.com and http://www.bearstearns.com.

Eighteen tranches from several 2001, 2002, and 2003 deals with loans originated by New Century Mortgage Corp. have been downgraded by Moody's Investors Service.In addition, five tranches have been placed under review for possible downgrade and the ratings on three tranches have been confirmed. The negative rating actions were based on "recent and expected pool losses and the resulting erosion of credit support," Moody's said. The collateral backing these classes consists primarily of first-lien, fixed- and adjustable-rate subprime mortgage loans. The deals were issued by Ace Securities Corp. Home Equity Loan Trust, Asset Backed Securities Corp. Home Equity Loan Trust, Merrill Lynch Mortgage Investors Trust, New Century Home Equity Loan Trust, and several Morgan Stanley entities. Moody's can be found online at http://www.moodys.com.

A newly enhanced index that ranks metropolitan statistical areas based on the risk of declining home prices indicates "a shift in risk toward Florida and California, as well as certain areas of the Southwest," according to PMI Mortgage Insurance Co., Walnut Creek, Calif.PMI said its U.S. Market Risk Index now features risk ranks that combine areas with consistent characteristics. The MSAs ranking highest on the index, with at least a 60% chance that home prices will decline over the next two years, are Riverside, Calif.; Phoenix; Las Vegas; and West Palm Beach, Fla. Five of the 11 MSAs facing a greater than 50% (but less than 60%) chance of price decline are in California (Los Angeles, Santa Ana, Oakland, Sacramento, and San Diego) and four are in Florida (Orlando, Fort Lauderdale, Miami, and Tampa), PMI reported. "Our new model gives more weight to the recent volatility of an area's price movements and is better suited for the vastly different market we are in today," said Mark F. Milner, chief risk officer of PMI Mortgage Insurance. "Our prior model, in contrast, was tuned to the rapidly appreciating market we were in from 2002 to 2006." PMI can be found online at http://www.pmigroup.com.

Members of the House Financial Services Committee are asking the Securities and Exchange Commission for guidance on restructuring troubled subprime loans in mortgage-backed securities so that servicers can prevent foreclosures.In a letter to the SEC, the committee members note that a lack of clarity is causing some servicers to refrain from making loan modifications for "fear" of violating the Financial Accounting Standard Board's servicing rule (FAS 140). "Does FAS 140 clearly address whether a loan held in trust can be modified when default is reasonably foreseeable or only once a delinquency or default has already occurred?" the June 15 letter inquires. "If not, can it be clarified in a way that will benefit both borrowers and investors?" Separately, the SEC, federal banking agencies, the Internal Revenue Service, the Big Four accounting firms, and mortgage industry officials are scheduled to meet with FASB members and staff on June 22 to discuss similar servicing issues involving loan modifications.

Three classes of certificates from two transactions issued by Merrill Lynch Mortgage Investors Trust in 2006 have been placed on review for possible downgrade by Moody's Investors Service.The affected securities are class B-5 of series 2006-SL1 and classes B-1 and B-2 of series 2006-SL2. "The projected pipeline loss has increased over the past few months and may affect the credit support for these certificates," Moody's said. Both transactions are backed by closed-end second-lien loans.

Eight certificates from four transactions issued by Bear Stearns Mortgage Funding Trust have been placed on review for possible downgrade by Moody's Investors Service.The affected securities are as follows: series 2006-SL1, classes M-6, B-1, B-2, B-3, and B-4; series 2006-SL2, class B-4; series 2006-SL3, class B-4; and series 2006-SL4, class B-4. "The projected pipeline loss has increased over the past few months and may affect the credit support for these certificates," Moody's said. The transactions are backed by second-lien loans.