Servicing

Prepayment rates for 30-year mortgages in Fannie Mae and Freddie Mac mortgage-backed securities fell modestly in January, driven by a seasonal decline in turnover that offset a 15-basis-point rally in mortgage rates, according to the Bear Stearns Prepayment Commentary.The aggregate speed on 30-year Fannie Maes was a constant prepayment rate of 11.5 CPR, down from 12.0 CPR in December, compared with 10.2 CPR for comparable Freddie Macs, down from 11.1 CPR in December, said Bear Stearns analysts Dale Westhoff and V.S. Srinivasan. "The biggest surprise in today's numbers was the decline in prepayments in higher coupons in the face of a significant rally in mortgage rates," the analysts said, noting that the rally exposed mainly newly originated mortgages backing 6.0% and 6.5% coupons. "These borrowers have seen little or no home price appreciation, reducing the cash-out incentive that has been such a critical component to the prepayment response in recent years." Meanwhile, aggregate speeds for 30-year Ginnie Mae collateral declined by 9% in January. Bear Stearns can be found online at http://www.bearstearns.com.

Anticipating a major spike in subprime second-lien delinquencies, HSBC Holdings, London, on Wednesday increased the bad-debt reserve on its U.S. B&C unit to $10.56 billion -- a stunning 125% increase from the reserve level on Sept. 30.During a Feb. 7 conference call, HSBC officials in London noted that adjustable-rate mortgage resets are set to explode -- and that most of the anticipated damage will come from residential loans funded through the wholesale/broker division of HSBC Financial, Prospects Heights, Ill. (the old Household Finance). In response to the deteriorating situation, HSBC officials signaled that the channel will be scaled back significantly, focusing only on broker-originated loans that have cross-sell or emerging market opportunities. HSBC bought Household Finance almost four years ago, agreeing to pay $14 billion for the business. In a December conference call with analysts, HSBC said it had increased the bad-debt reserve on its subprime business to $8.8 billion. According to a third-quarter Securities and Exchange Commission filing by HSBC Finance (the unit that houses HSBC Financial, the lender), the reserve was $4.64 billion. According to the Quarterly Data Report, HSBC services $51 billion in subprime mortgages, ranking seventh nationwide. In the third quarter, HSBC funded $11.7 billion in subprime loans, ranking third. (For more details, see the Feb. 12 issue of National Mortgage News..)

Classes B-1 and B-2 of First Franklin Mortgage Loan Trust, series 2003-FFB, have been placed under review for possible downgrade by Moody's Investors Service.The rating actions were based on low credit enhancement levels in comparison with loss projections, Moody's said. The overcollateralization amount has declined below the required level, and mortgage insurance does not cover all the losses, "leaving the subordinate tranches with eroding credit protection," the rating agency said. The subprime deal consists of closed-end, fixed-rate, second-lien residential mortgage loans. Moody's can be found online at http://www.moodys.com.

In the fourth quarter, 84% of the homeowners who refinanced their homes got a mortgage at least 5% larger than the original loan, down from 87% in the previous quarter, according to Freddie Mac.However, the percentage was higher than the 81% level recorded a year earlier, the government-sponsored enterprise said in its quarterly refinance review. "Falling mortgage rates encouraged some people to refinance to lower their payments -- for example, if they had an adjustable-rate mortgage that was scheduled to reset soon," said Frank Nothaft, Freddie Mac's chief economist. "But the primary driver of refinance continues to be equity extraction." Freddie Mac can be found on the Web at http://www.freddiemac.com.

Two classes of Bank of America Alternative Loan Trust mortgage pass-through certificates have been placed on Rating Watch Negative by Fitch Ratings.The affected securities are class 15-B5 of series ALT 2004-9 pool 4 and class 15-B5 of series ALT 2004-10 pool 3. Fitch also affirmed the ratings on 324 classes from 14 BoA ALT transactions. The negative rating actions were based on a deterioration in the relationship between credit enhancement and loss expectations, Fitch said.

Mortgage Lenders Network USA, Middletown, Conn. -- once a top-15 subprime lender -- filed for Chapter 11 bankruptcy protection on Feb. 5, a spokesman for the company has confirmed to MortgageWire.The filing comes a few days after MW broke the news that Marathon Asset Management, New York, which had considered investing in the struggling company, had pulled out of talks with the nondepository. At deadline time MLN was preparing a statement. MLN recently began cutting workers in its servicing department. In late December, faced with a liquidity crisis, it closed the wholesale unit that accounted for 90% of its production. It has since been barred from funding new loans by several states. Its warehouse providers have included Merrill Lynch and RFC-GMAC. It owns roughly $17 billion in housing receivables. MLN can be found on the Web at http://www.mlnapproves.com.

Wachovia Securities has retained its position at the top of the Mortgage Bankers Association's annual ranking of commercial and multifamily mortgage loan servicers in total primary and master servicing volume, at $306.6 billion.Following Wachovia are Capmark Finance, with $229.3 billion; Midland Loan Services, with $213.4 billion; Wells Fargo, with $132.9 billion; and KeyBank Real Estate Capital, with $105.5 billion. (These companies are also the top primary and master servicers, in the same rank order, for commercial mortgage-backed securities, except that Bank of America NA ranks fifth instead of KeyBank.) Rankings of servicing for life company loans place GEMSA Loan Services at the head of the list, the trade group reported, followed by Prudential Asset Resources, Midland, NorthMarq Capital, and Capmark. Midland is ranked No. 1 for servicing of Fannie Mae and Freddie Mac loans, followed by Deutsche Bank Commercial Real Estate, Wachovia, Capmark, and ARCS Commercial Mortgage. Wachovia is No. 1 for servicing of commercial bank and savings institution loans. The MBA can be found online at http://www.mortgagebankers.org.

Accelerating subprime foreclosures reached 4.13% in November, up 72% over the previous 12 months, according to a report by Friedman, Billings, Ramsey & Co.The foreclosure rate has jumped 174 basis points since November 2005, when it stood at 2.39%. Following the last recession, the subprime foreclosure rate almost reached 10% in 2002, according to the Mortgage Bankers Association. "We don't think that we will get to that level again, because we have a good job market," said MBA senior economist Mike Fratantoni. He said he does not expect another recession for several years and believes that the strong job market will keep foreclosures at a manageable level. The FBR report, based on data from subprime securitizations, also shows that the default rate on subprime loans hit 10.1% in November, up 347 bps since November 2005. (The default rate includes loans 90 days or more past due, foreclosures, and real estate owned.)

The class A notes issued by HarbourView CDO III Ltd., a collateralized debt obligation that includes mortgage-backed securities, has been downgraded from B to A-minus by Fitch Ratings.Fitch also lowered the Distressed Recovery rating on the class B notes from DR5 to DR6, and assigned a DR2 rating to the class A notes. The rating agency said the deal has been in default since March 2005, when the principal balance of the collateral debt securities fell below the aggregate balance of the rated notes. HarbourView III has exited its reinvestment period with a portfolio consisting chiefly of "diversified structured finance assets" as well as corporate debt and the debt of real estate investment trusts, the rating agency said. Fitch can be found online at http://www.fitchratings.com.

The ratings of WCI Communities Inc., a Bonita Springs, Fla.-based homebuilder and the parent company of WCI Mortgage, have been lowered from B1 to B2 by Moody's Investors Service, and its senior subordinated notes have been downgraded from B3 to Caa1.The ratings outlook remains negative. The downgrades were triggered by WCI's "persistently unfavorable performance vs. expectations in 2006 and Moody's concern that this underperformance may last for much of 2007." The rating agency said WCI's cash collections were hurt in the fourth quarter by delays in construction, in receipt of certificates of occupancy, and in getting buyers to closings, as well as by higher cancellation rates. Moody's said WCI's ability to reduce debt leverage from its "unacceptably high" rate of nearly 67% to its target rate of 50%, and its ability to comply with financial covenants in its credit facilities, will be "greatly challenged." WCI can be found online at http://www.wcicommunities.com.