Servicing

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.

Class M-3 of RFSC Series 2003-RP1 Trust has been downgraded from B3 to Caa3 by Moody's Investors Service, and classes M-3 and M-4 of RFSC Series 2004-RP1 Trust have been placed on review for possible downgrade.The downgrade was attributed to continued losses that have led to "significant deterioration" in overcollateralization. The other two tranches were placed on review based on the weaker-than-expected performance of the underlying pool of subprime and re-performing residential mortgage loans, the rating agency reported.

Community banks cut back on their sales of newly originated single-family loans to wholesalers and secondary-market agencies last year, and sales to Fannie Mae dropped the most, according to a survey by America's Community Bankers.The 215 institutions responding to ACB's annual Real Estate Survey sold only 24% of their loan production in 2006, down from 34% in 2005. Conduits and wholesalers purchased 40% of the $1.95 billion loans sold in the secondary market and Fannie and Freddie Mac purchased 41%. Freddie's share increased by five percentage points to 26%, and Fannie's share fell five percentage points to 15%. The survey respondents originated $20.5 billion in residential mortgages in the first nine months of 2006, and 39% expect to see an increase in loan production in 2007, while 27% expect to see a decline. The respondents are "not as optimistic as they were last year," said ACB senior vice president Debra Cope. ".... The only business where a majority saw a prospect for an increase was home equity lending." A large majority said they expect to see a decline in construction and multifamily lending.

Class B-1 of Centex Home Equity Loan Trust series 2002-C has been downgraded from Baa2 to Baa3 by Moody's Investors Service.The downgrade was based on low credit enhancement levels compared with current loss projections, Moody's said. "The credit support has declined because the deal stepped down, allowing a large portion of the credit support to leak out," Moody's reported, adding that the realized losses have caused overcollateralization to fall below the required level. The underlying collateral consists of fixed- and adjustable-rate, first- and second-lien residential mortgage loans.

Class M5 of Asset Backed Securities Corp. mortgage pass-through certificates, series 2003-HE3, has been downgraded from BBB-minus to BB by Fitch Ratings.In addition, Fitch placed the following four ABSC classes on Rating Watch Negative: series 2003-HE2, class M-5; series 2004-HE6, classes M6 and M7; and series 2004-HE8, class M7. Fitch also affirmed the ratings on 184 other classes in 24 ABSC deals. The rating agency attributed the downgrade to a deterioration in the relationship between loss expectations and credit support levels. The watchlist placements were due to "signs of increasing credit risk, posing a potential threat to subordinate bonds," Fitch said.