Servicing

The performance of adjustable-rate subprime mortgages originated in 2006 is rapidly deteriorating and "higher default and loss rates may ensue," according to researchers at Friedman, Billings, Ramsey & Co.The default rate on 2006 subprime ARMs jumped 27% in November to 3.21% while the default rate on loans originated in 2005 hit 6.49%. The FBR researchers noted that the 2006 vintage has a higher interest rate (8.20%) than 2005 loans (7.36%), which implies that 2006 borrowers have higher debt service burdens. "It appears that subprime lenders may have mended their tattered profitability in 2006 by originating loans with higher mortgage rates, perhaps to riskier borrowers," the FBR report says. Based on preliminary volume data, the Arlington, Va.-based investment banking firm is reporting that issuance of non-agency subprime MBS fell 12.3% in 2006 to $521.3 billion, down from $594.4 billion in the previous year. However, alternative-A MBS issuance jumped 12.5% to $299.9 billion.

A New York law firm has filed a shareholder lawsuit against the largest mortgage lending company, Countrywide Financial Corp., for allegedly backdating stock options.The complaint alleges that certain Countrywide executives and directors "manipulated the prices of stock option grants," according to the law firm Stull, Stull & Brody. Countrywide had not commented on the suit by MortgageWire's deadline. Backdating stock options allows companies to report lower compensation costs and allows recipients to reap larger benefits. Stull, Stull & Brody has filed similar lawsuits against other companies. It is also investigating other companies that have received a letter of inquiry from the Securities and Exchange Commission or been contacted by a U.S. attorney's office or other federal agency relating to backdating.

Doral Financial Corp., the troubled mortgage lender based in San Juan, Puerto Rico, has reported a net loss of $28.7 million ($0.34 per share) for the third quarter, bringing itself current on its reporting obligations to the Securities and Exchange Commission.Doral said its net loss for the first three quarters of 2006 total $62.5 million ($0.81 per share). The company said its "greatest liquidity challenge" is refinancing $625 million of floating-rate senior notes. "Doral Financial will need significant outside financing during 2007, principally for the refinancing of these notes that mature in July 2007 and to meet certain other working capital and contractual needs of the holding company," the company said. In September, Doral announced an agreement with the SEC to pay a $25 million civil penalty in connection with a probe of Doral's restatement of financial results for 2000-2004. The restatement slashed $694.4 million from its retained earnings through the end of 2004 to correct the accounting for certain mortgage loan sales and the valuation of its interest-only strips. Doral can be found online at http://www.doralfinancial.com.

Fannie Mae has announced that, effective Jan. 30, borrowers must be qualified at "a fully-indexed rate that assumes a fully-amortizing repayment schedule" in order to qualify a loan for purchase by the government-sponsored enterprise.The GSE is also eliminating its "InterestFirst" interest-only loan product category and reclassifying it as a loan "feature" to be used with other mortgage products. In addition, Fannie will be permitting temporary buydowns for fixed-rate mortgage loans with an IO feature and making other changes to its IO underwriting. Fannie Mae can be found on the Web at http://www.fanniemae.com.

Alliance Bankshares Corp., Chantilly, Va., has announced that its mortgage banking unit, Alliance Home Funding, will cease operations as a stand-alone subsidiary.Thomas A. Young Jr., president and chief executive officer of Alliance Bankshares, said the mortgage banking unit's business results over the past several years have "fallen short" of the parent company's objectives. "As we enter 2007, with a continued modest outlook in the housing sector, we felt a radical change was necessary," Mr. Young said. The new plan calls for about 10 employees to join the bank as part of a mortgage banking division that will offer mortgages to customers, prospects, and homebuilder clients, he said. "The focused approach of this division should lead to better performance metrics," Mr. Young said. The company estimated that it will take a fourth-quarter pretax charge of $540,000 to $675,000 to wind down the operations of Alliance Home Funding. The parent company can be found on the Web at http://www.alliancebankva.com.

Three classes from two Aegis Asset Backed Securities Trust securitizations have been downgraded by Fitch Ratings.The downgrades were as follows: series 2003-1, class M2, from A to BBB-plus, and class B1, from BB to CC (and assigned a Distressed Recovery rating of DR3); and series 2003-2, class B, from BBB to BB-plus (and removed from Rating Watch Negative). Fitch also upgraded one class in series 2003-2 and affirmed the ratings on three other classes in the two transactions. The downgrades were attributed to deterioration in the relationship between credit enhancement and loss expectations, the rating agency said. The collateral pools for both deals consist of subprime residential mortgage loans.

Seven classes from five Merrill Lynch Mortgage Investors Inc. subprime securitizations have been downgraded by Fitch Ratings.The downgrades were as follows: series 2002-AFC1 group 1, class BF-1, from BB to B-plus, and group 2, class BV-1, to BB (and removed from Rating Watch Negative); series 2003-HE1, class B2, from BBB-plus to BB-plus, and class B3, from BBB-minus to BB-minus; series 2003-WMC1, class B2, from BBB-minus to BB-plus; series 2003-WMC2, class B2, from BBB to BB-plus; and series 2005-SL1, class B5, from BBB-minus to BB-plus. The rating agency also placed classes B1 and B2 of series 2002-NC1 and classes B4 and B5 of series 2005-HE1 on Rating Watch Negative. In addition, four classes from four of the transactions were upgraded and the ratings on 39 other classes from eight MLMI subprime deals were affirmed. The negative rating actions were attributed to a deterioration in the relationship between credit enhancement and loss expectations.

Fitch Ratings has assigned Branch Banking and Trust an RPS3-plus residential primary servicer rating for prime loans.Fitch said the rating is based on the company's "experienced and tenured management team, capable loan administration processes, and effective use of technology." Branch Banking and Trust is based in Winston-Salem, N.C., and its largest subsidiary is Branch Banking and Trust Co. BB&T's mortgage loan servicing center is located in Greenville, S.C.

Fitch Ratings has upgraded GMAC Mortgage LLC's special servicer rating from RSS1-minus to RSS1 and removed it from Rating Watch Evolving.The rating agency also assigned the company an RPS1 residential primary subservicer rating. In addition, Fitch affirmed and removed from Rating Watch Evolving the company's RPS1 residential primary servicer ratings for prime, alternative-A, subprime, high loan-to-value, and home equity/home equity line of credit loan products. "The primary, special, and subservicer ratings are based on the company's solid loan administration practices, experienced management team, comprehensive internal controls, robust technology platform, effective management and liquidation of delinquent and nonperforming residential mortgage loans and real-estate-owned assets, and demonstrated ability to provide effective subservicing for third-party portfolios," Fitch said. Fitch rates residential servicers on a scale of 1 to 5, with 1 being the highest rating. The rating agency can be found online at http://www.fitchratings.com.

Fitch Ratings has assigned HSBC Mortgage Corp. (USA) an RPS2-plus residential primary servicer rating for prime, alternative-A, and home equity/home equity line of credit products.Fitch said the rating is based on HSBC Mortgage's "experienced management team, solid internal controls, and integrated technology." Fitch said the rating also reflects the financial strength of parent company HSBC Holdings PLC, which has an issuer default rating of AA from Fitch. HSBC Mortgage, based in Depew, N.Y., is a wholly owned subsidiary of HSBC Bank USA NA, which is a subsidiary of HSBC Holdings. Fitch rates residential servicers on a scale of 1 to 5, with 1 being the highest rating. The rating agency can be found online at http://www.fitchratings.com.