Servicing

The performance of subprime adjustable-rate securities issued in 2006 continues to deteriorate rapidly, and the default rate hit 4.62% in January, up 21% in just one month, according to a report by Friedman Billings Ramsey.The default rate of the 2006 origination year exceeds that of 2005 by 51.6% and that of 2004 by a "whopping" 137% at the same age, the FBR report says. The early defaults on 2006 originations have sparked massive loan buybacks and forced a dozen subprime firms into bankruptcy. In a previous report, FBR researchers warned that this book of business is rapidly deteriorating and that "higher default and loss rates may ensue." FBR can be found online at http://www.fbr.com.

Fannie Mae's board of directors has approved the redemption of all eight million outstanding shares of series K variable-rate noncumulative preferred stock.The government-sponsored enterprise said the shares, which have an aggregate stated value of $400 million, will be redeemed in accordance with the series K stock's certificate of designation of terms. The stock will be redeemed on April 2 at a redemption price of $50 per share plus a dividend, which will accrue at the swap rate (as defined in the certificate of designation) plus 1.33% for the period from March 31 to April 2, 2007, Fannie said. Robert Blakely, Fannie's chief financial officer, said redeeming the costly variable-rate stock in the current rising rate environment "will result in millions of dollars in annual after-tax savings." The GSE can be found online at http://www.fanniemae.com.

The American Securitization Forum has released a draft template report that issuers, especially mortgage securitizers, may find helpful in complying with item 1122 of the Securities and Exchange Commission's new Regulation AB.An ASF working group created the draft to aid issuers using a new interpretation of the item to avoid compiling audit attestation reports from what can be a large number of nondiscretionary servicing vendors by having their primary servicer take responsibility for those vendors' compliance. The forum will be open to feedback on the draft and plans to have the final version available by the end of February.

The Federal Agricultural Mortgage Corp., commonly known as Farmer Mac, has announced the purchase of mortgage-backed securities representing beneficial ownership interests in $365 million of distribution cooperative mortgage loans sold by the National Rural Utilities Cooperative Finance Corp.The asset sale should improve loan pricing to the cooperative members of National Rural Utilities Cooperative Finance Corp. and it "advances Farmer Mac's role in financing rural America," said Farmer Mac, a government-sponsored enterprise that provides a secondary market for agricultural real estate and rural housing mortgage loans. The organizations can be found on the Web at http://www.farmermac.com and http://www.nrucfc.coop.

Risk in the mortgage market may be severely understated, according to new research that calls into question the ability of rating agencies to assess the dangers of collateralized debt obligations backed by mortgages and communicate them to investors.A paper presented at the Hudson Institute, a nonpartisan public policy research organization based in Washington, found that such CDOs could experience significant losses if the U.S. housing market continues to stagnate. "We don't want to shut down" mortgage-backed securities, said one of the study's authors, Joseph Mason of the LeBow School of Business at Drexel University. "We're only looking for greater transparency to foster stability." As it is now, Mr. Mason said, rating agencies "can't look under the hood of these deals unless they are qualified investors." But Michael Fratantoni, senior director of single-family research and economics at the Mortgage Bankers Association, played down the research, saying that while CDOs are complicated, they should not be looked at in isolation. "Complexity is in the eye of the beholder," the MBA economist said. "There is no lack of information." However, Mr. Mason warned that the rise in private-label CDOs that are not backed by the government is a potential threat to the economy if home prices depreciate. "It won't start a recession," he said. "But if we get into an economic downturn, it could widen."

Credit-Based Asset Servicing and Securitization LLC -- which is backed by two mortgage insurance giants -- has agreed to pay $260 million for Fieldstone Investment Corp., Columbia, Md., a publicly traded nonprime lender.As of midday Friday, Fieldstone's shares had almost doubled in value to just over $5 each. Fieldstone services just shy of $6 billion in loans, ranking 28th among subprime firms, according to the Quarterly Data Report. It ranks 24th among subprime lenders. C-BASS -- a specialty servicer controlled by MI giants MGIC and Radian -- said it would pay $5.53 a share for the mortgage banking REIT, which lost $37.2 million through the first nine months of last year. According to a statement issued by the companies, the per-share purchase price is subject to a $0.20 reduction "in the event Fieldstone does not complete settlement of certain litigation pending prior to the merger." The company is a defendant in at least four civil cases, involving different matters, including a shareholder suit that could cost it $19 million.

Class MV-4 of CitiFinancial Mortgage Securities Inc. 2003-1 has been placed on review for possible downgrade by Moody's Investors Service.In addition, 18 tranches from four Citi transactions have been placed on review for possible upgrade. The negative rating action was attributed to declining credit enhancement resulting from recent losses. The collateral backing the affected classes consists primarily of first-lien subprime residential mortgage loans.

Eight tranches from five deals originated with collateral from Option One Mortgage Corp. in 2003 have been placed under review for possible downgrade by Moody's Investors Service.The affected classes from Option One Mortgage Loan Trust are as follows: series 2003-3, classes M-5 and M-6; series 2003-4, class M-6; series 2003-5, classes M-5 and M-6; and series 2003-6, class M-6. The affected classes from ABFC 2003-OPT1 Trust were classes M-5 and M-6 of series 2003-OPT1. In addition, Moody's has placed two tranches from one Option One deal under review for possible upgrade. The negative rating actions were attributed to credit enhancement levels that may be low given the projected losses on the underlying pools. The transactions consist primarily of first-lien, adjustable- and fixed-rate subprime mortgage loans.

The ratings on 18 subordinate classes from 11 residential mortgage-backed securities transactions issued in 2006 have been placed on CreditWatch with negative implications by Standard & Poor's Ratings Services.The actions reflect "early signs of poor performance" of the collateral backing the transactions, which consists of subprime, alternative-A, and closed-end second-lien loans, S&P said. The percentage of loans in the pools that are severely delinquent (delinquent more than 90 days, in foreclosure, or real estate owned) ranges from 2.77% to 13.46%, S&P reported. Placing ratings on negative CreditWatch when a transaction has not incurred a loss represents something new, according to S&P. "The combination of early high delinquencies and minimal or no loss experience had not been seen in the performance exhibited by prior vintages," the rating agency said. "Many of the 2006 transactions may be showing weakness because of origination issues, such as aggressive residential mortgage loan underwriting, first-time homebuyer programs, piggyback second-lien mortgages, speculative borrowing for investor properties, and the concentration of affordability loans." S&P can be found online at http://www.standardandpoors.com.

Class M-7 of Bear Stearns Asset-Backed Securities series 2005-2 has been removed from Rating Watch Negative by Fitch Ratings.In addition, Fitch affirmed the ratings on seven other classes in the deal. The Rating Watch removal reflects a decline in monthly losses, Fitch said. "The average monthly excess spread over the past six months has been greater than monthly losses and has allowed overcollateralization to grow," the rating agency said. Fitch can be found online at http://www.fitchratings.com.