Servicing

Four classes from four Citigroup Mortgage Loan Trust transactions have been placed on Rating Watch Negative by Fitch Ratings.The affected classes were as follows: class III-B5 of series 2005-5; class 2-B5 of series 2006-AR5; class M5 of series 2006-WF1; and class M-5 of series 2006-WF2. Fitch also affirmed the ratings on 25 other classes in the four transactions. The negative rating actions reflect deterioration in the relationship between credit enhancement and expected losses, the rating agency said. The loans consist of fixed-and adjustable-rate mortgages extended to alternative-A borrowers and secured by first liens, primarily on one- to four-family residential properties.

Increased litigation is likely in the subprime mortgage arena, according to the head of the mortgage and lending litigation practice of Stradley Ronon Stevens & Young LLP, Philadelphia.Stradley Ronon cited a recent finding in a Credit Suisse report that nearly 25% of subprime mortgage deals issued last year had a delinquency rate of at least 8% as of December. "With rising default rates among subprime borrowers, lenders will be faced with the potential for increased litigation and an [increasingly] hostile regulatory environment," said Andrew K. Stutzman, the law firm's mortgage and lending litigation chair. "I think borrowers will look for any avenue they can to avoid bankruptcy or foreclosure, and some will choose litigation as a way to keep their house and credit intact. As I see it, mortgage companies will not sit idly by and settle these suits, but will defend them vigorously."

Servicers, community groups, investors, and investment banks should work together to help subprime borrowers who can't afford their current loans and can't find new financing, a major subprime servicer has told a congressional panel.Ocwen Financial Corp. vice president William Rinehart testified that the recent underwriting and product changes in the subprime market will be beneficial and will reduce early defaults on new loans. However, the changes dictated by investors and regulators will make it more difficult for existing subprime borrowers to "fix their current problems," he warned. "Ocwen and other servicers, [community groups], investors and investment banks must work together to help these homeowners already facing difficulties," Mr. Rinehart said. Ocwen, based in West Palm Beach, Fla., is the sixth-largest subprime servicer, according to NMN's Quarterly Data Report.

Congress should examine the causes of foreclosures before rushing to judgment and prescribing new restrictions on lenders that could "unfairly curtail access to credit," according to the president of the National Association of Mortgage Brokers.The NAMB has been pushing for the Government Accountability Office to conduct a study on foreclosures, and the chairman of the House Financial Services Committee, Rep. Barney Frank, D-Mass., is expected to submit a request to the GAO. "No one questions the personal heartbreak of foreclosure or the serious effect this is having on America's cities," NAMB president Harry Dinham told a House Oversight and Government Reform subcommittee on March 21. However, there are a number of possible factors -- bankruptcy reform, credit card debt, low savings rates, and decreasing home values, as well as illness and other life events -- that could explain recent increases in foreclosures, he said.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., is calling on lenders, investors, and other stakeholders to work together to provide relief for subprime borrowers facing foreclosure."The solution to this problem may not be legislative," Sen. Dodd said at a hearing on the turmoil in the subprime market. "Instead, I intend to ask leaders from all the stakeholders -- regulators, investors, lenders, GSEs, FHA, and consumer advocates -- to come together and try to work out an efficient process for providing relief to homeowners." The subcommittee chairman accused the regulators of being "spectators" as lenders pushed unaffordable subprime loans. He said he plans to introduce a bill that "attacks" predatory lending. "We need to put a stop to abusive and unsustainable lending," he said. Sen. Dodd acknowledged that it will be "tough" to pass a predatory lending bill, but added that "we must try."

Bank of America has extended the terms of its warehouse line to Option One Mortgage Corp., but reduced the facility by about half -- to just over $2 billion, according to a new public filing.H&R Block, the parent of Option One of Irvine, Calif., said in a filing with the Securities and Exchange Commission that it also amended a servicing and sale agreement with Wells Fargo Bank, but offered no details on what those changes entail. The BoA warehouse line has been extended to March 14, 2008, but is subject to several "performance triggers" tied to capital, net income, defaults, and related matters. H&R Block is trying to sell Option One and is supposed to make a public announcement regarding the sale process by the end of the week of March 25. According to the Quarterly Data Report, Option One ranks seventh among all subprime originators in the United States.

Fitch Ratings has lowered the residential primary servicer rating of Accredited Home Lenders Inc. from RPS3-plus to RPS3-minus for subprime loans.The rating agency said the downgrade was based on "the challenging operating environment in the subprime mortgage market and uncertainties over [Accredited's] ability to maintain adequate funding and remain viable over the intermediate term." Fitch noted that Accredited announced March 16 that it had reached an agreement to sell $2.7 billion of loans at a discount in order to alleviate pressure from margin calls. The rating agency also noted the company's March 20 announcement of a commitment for a $200 million term loan from entities managed by Farallon Capital Management LLC. Fitch rates residential servicers on a scale of 1 to 5, with 1 being the highest rating.

Bids are being accepted on two portfolios of mortgage servicing rights involving some $290 million of home loans.Interactive Mortgage Advisors, Denver, is brokering the sale of MSRs on a $202 million home loan portfolio of Fannie Mae, Freddie Mac, and Federal Home Loan Bank loans. The loans have a weighted average loan balance of $89,493 and are backed predominantly by homes in Utah. Bids are due March 29. A second portfolio totaling $88 million in Fannie Mae and Freddie Mac loans from New York State is being brokered by Mortgage Industry Advisory Corp., New York. The average unpaid balance on that portfolio is $163,014, and bids are due on March 30.

Rating agencies Standard & Poor's and Moody's Investors Service expect the 2006 book of subprime mortgages to perform well below the norm, but spokesmen for the firms say they don't believe problems on the lowest rung of the credit ladder will reach up to take a bite out of the prime and alternative-A sectors."The turmoil so far has been limited to the subprime space," S&P's Scott Mason said at the Mortgage Bankers Association's National Nonprime and Networking Conference in Carlsbad, Calif. "There will probably be some tightening in alt-A as well, but that's about it." David Teicher of Moody's agreed. Although early payment defaults have increased dramatically in the two sectors, he said, they are rising from general delinquency levels that are low by historical standards. Mr. Mason told the conference "there's a good probability" that vintage 2006 nonprime loans "will be one of the worst-performing in recent history." Mr. Teicher said that while it's still "too early to tell" how last year's subprime book will perform, it is more likely to play worse than better.

Fremont General Corp., Santa Monica, Calif., has agreed to sell $4 billion in subprime loans to an unnamed buyer (or buyers) -- but will book a $140 million loss on the deal.It is unclear whether servicing rights tied to these loans are also being sold. The lender could not be reached for comment. Fremont is trying to sell its subprime division, which services $27 billion in loans but has stopped funding new originations. Fremont, a depository, said it has received "approximately $950 million in cash from the first sale installment under the agreements, with the remaining sales under the agreements expected to be completed over the next several weeks." The company, in a filing with the Securities and Exchange Commission, said the mortgages are being sold at a discount, "reflecting current conditions in the sub-prime mortgage market."