Servicing

Mortgage brokers and other nonbank lenders would have a fiduciary duty to their borrowers under a bill introduced by Sen. Charles E. Schumer, D-N.Y., that also holds lenders accountable for the subprime loans they fund and purchase from brokers.The bill introduced by Sens. Schumer, Robert P. Casey Jr., D-Pa., and Sherrod Brown, D-Ohio, amends the Truth in Lending Act to prohibit all lenders from steering borrowers into loans they cannot afford or repay. It also requires all originators to underwrite loans at the fully indexed rate and mandates the establishment of escrow accounts. The subprime market has been the "Wild West" of the mortgage industry, and this bill "brings the sheriff back in town," Sen. Schumer said. The senators are also calling for a $300 million appropriation to fund foreclosure prevention counseling that could help 300,000 distressed subprime borrowers. The senators are also calling on mortgage companies to voluntarily match these federal funds.

Citigroup, JPMorgan Chase, Litton Loan Servicing, and HSBC have agreed to a set of principles espoused by Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., to take early action to help subprime borrowers through loan modifications to avoid foreclosure."I commend the organizations and companies that have joined me in formulating and agreeing to these principles, and I urge others to participate," Sen. Dodd said. Under the principles, lenders and servicers should contact subprime borrowers with adjustable-rate mortgage loans to make sure they can afford the payments once the loan resets. If not, loan modifications should be explored, including switching the loan to a fixed rate or making the introductory rate permanent. The principles also call for servicers to ramp up so that loan modifications can be done on a scale needed to address the foreclosure crisis. Chase Home Loan chief executive David Lowman said his company supports Sen. Dodd's efforts to help families who are struggling with their mortgage payments. "We believe we can develop the best solutions by working with the Senate committee, our regulators, borrowers, investors, and community representatives," Mr. Lowman said. The Mortgage Bankers Association, Fannie Mae, Freddie Mac, Bear Stearns & Co., and Self-Help Credit Union also support the principles.

A key rating of Residential Capital LLC was lowered by Standard & Poor's Ratings Services after the announcement of ResCap's huge subprime-related first-quarter loss, and Moody's Investors Service and Fitch Ratings revised ResCap's ratings outlook from stable to negative.S&P downgraded ResCap's counterparty credit rating from BBB/A-3 to BBB-minus/A-3, while affirming the counterparty credit rating of its parent company, GMAC LLC, at BB-plus/B-1. "ResCap's loss was significantly worse than we had anticipated," S&P said. S&P rated ResCap's outlook as stable, but GMAC's outlook was revised from developing to negative. Moody's revised ResCap's outlook from stable to negative and said GMAC's ratings are not affected. Fitch also revised its rating outlook for ResCap from stable to negative and affirmed the company's issuer and debt ratings. The rating agencies can be found online at http://www.standardandpoors.com, http://www.moodys.com, and http://www.fitchratings.com.

Two certificates from two transactions issued by CWABS Asset-Backed Certificates Trust have been downgraded by Moody's Investors Service.Class B of series 2005-IM1 was downgraded from Baa3 to Ba3, and class B of series 2005-IM2 was downgraded from Baa2 to Ba1. Moody's also confirmed one CWABS class. The downgrades were attributed to credit enhancement levels that were deemed too low in view of projected losses. "Both transactions had a spread holiday during the first six months, delaying the buildup of overcollateralization," Moody's said. "Furthermore, loans in foreclosure and REO have significantly increased since closing." The transactions are backed by alternative-A mortgage loans.

Three certificates from two deals issued by GSAMP Trust in 2002 and 2003 have been downgraded by Moody's Investors Service.The downgrades were as follows: series 2002-HE, class B-1, from Baa1 to Ba2, and class B-2, from Baa2 to B1; and series 2003-HE1, class B-2, from Baa3 to B2. In addition, class B-2 from series 2003-HE2 was placed on review for possible downgrade, and the ratings on three certificates were confirmed. The actions were based on an "analysis of the credit enhancement provided by subordination, overcollateralization, and excess spread relative to the expected loss," Moody's said. The rating agency can be found online at http://www.moodys.com.

The Colorado legislature is on track to pass some of the toughest laws in the country governing the conduct of state-licensed mortgage bankers, loan officers, and mortgage brokers in response to the state's foreclosure problems.Several bills coming up for a vote would require the state's 22,000 originators to have a surety bond and errors-and-omissions insurance. These measures would create a "duty of good faith and fair dealing" with borrowers and prohibit unconscionable acts, such as making a loan the borrower cannot afford to repay. A mortgage fraud bill creates a private right of action for borrowers to sue originators and other real estate professionals. There also are penalties for intimidating or coercing appraisers, along with criminal penalties against anyone who knowingly submits a false appraisal. "Colorado's aggressive response to our high foreclosure rate is really going to capture a lot of attention," said Erin Toll, director of Colorado's real estate division.

Granting bankruptcy judges the authority to modify mortgage loans would provide relief to homeowners facing foreclosure who can't get the servicers of mortgage-backed securities to restructure their loans, a consumer bankruptcy attorney has told a House Judiciary subcommittee.Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, testified that about half of the securitized trusts prohibit loan modifications. If Congress amends the bankruptcy code to allow loan modifications, it would "resolve that problem," he said. Steve Bartlett, president and chief executive of the Financial Services Roundtable, warned that giving bankruptcy judges a free hand to modify loans would make mortgage credit "much more expensive and less available to low- and moderate-income people." Rep. Melvin Watt, D-N.C., indicated he would consider changes to the bankruptcy code in putting together a predatory-lending bill.

Massachusetts Gov. Deval Patrick has ordered state banking regulators to seek delays of up to two months on foreclosures against homeowners who have filed complaints with the Division of Banks.The move makes the commonwealth the first state in the country to place a moratorium on repossession proceedings, but it is not unprecedented. Years ago, shortly before adjustable-rate mortgages were approved by federal authorities, states held sway over institutions in their jurisdictions that made what were then known an variable-rate mortgages. And one, Wisconsin, refused to allow lenders to reset loans to higher levels when the market rate moved into double-digit territory. This time around, housing advocates say they expect Gov. Patrick's action to set the pattern for other states. "We will bring the Massachusetts standard nationwide," Bruce Marks, head of Neighborhood Assistance of America, told the Boston Herald. The governor said in a statement that stays would be sought on a case-by-case basis, but Mr. Marks indicated that his group would assist owners who are struggling to make their payments in filing complaints with the state. "It is effectively a moratorium of foreclosures in Massachusetts," he is quoted as saying. "It is a very big deal."

Fannie Mae, which is still trying to get its financial books in order, says it earned $6.35 billion in 2005, a 28% increase from the profits recorded in the prior year.The congressionally chartered mortgage giant said it expects to release results for 2006 later this year. In a filing with the Securities and Exchange Commission May 2, Fannie revealed that its strongest profit growth came in the capital markets area, where it had net income of $2.99 billion, up 42% from that of 2004. Its two other main business segments -- the single-family credit business, and housing and community development -- earned $2.88 billion (up 15%), and $462 million (up 37%), respectively. Fannie Mae can be found on the Web at http://www.fanniemae.com.

The Tennessee Housing Development Agency has announced an offering of $120 million of Homeownership Program Bonds to retail and institutional investors, the largest such offering in six years.The large bond size stems from growing demand for the THDA's 30-year single-family mortgages, the agency said. "A variety of factors have led to the unprecedented demand for THDA's first-time homebuyer program, including more emphasis on training and outreach," said Ted R. Fellman, executive director of the agency. "In addition, we introduced a third mortgage option, giving qualifying homebuyers the ability to choose the program that best meets their individual needs. Homebuyers that choose less downpayment or closing cost assistance receive the lowest mortgage rate." The agency can be found online at http://www.tennessee.gov/thda/index.htm.