Servicing

KeyCorp, Cleveland, has put its subprime residential lending division, Champion Mortgage, on the auction block.KeyCorp bought the subprime retail lender back in 1997, paying $289 million in stock for the company. A year later the subprime business began a severe correction that lasted about three years. In a statement, bank CEO Henry Meyer said Champion "no longer fits our longer-term strategic priorities." For years KeyCorp has refused to disclose production and servicing information on the Parsippany, N.J.-based company. In a statement it would only say that Champion has a $2.5 billion "loan portfolio." According to estimates made by the Quarterly Data Report, Champion/Key ranks 22nd among subprime servicers and 34th among funders. A few weeks back, another Cleveland bank, National City, disclosed that it might sell its subprime residential division, First Franklin.

One-third of banks expect the credit quality of their subprime and nontraditional mortgage holdings to deteriorate over the next 12 months, according to a July survey of senior loan officers by the Federal Reserve Board.But so far, the performance of those loans has been fairly steady. Over 85% of senior loan officers reported that the performance of their subprime loans and nontraditional loans is "unchanged" over the past 12 months. "Eight banks reported that the quality of their portfolios of nontraditional products performed better than had been expected, and only one institution indicated that the quality of its portfolio had performed somewhat worse than had been anticipated," the Fed said. The July survey of senior loan officers found that banks generally hold more nontraditional loans -- alt-A, interest-only and option-adjustable mortgages -- on their books than subprime credit quality loans. Only 30 banks said they hold subprime loans, compared to 48 banks taking part in the survey that hold non-traditional loans.

Class M-3 of Residential Accredit Loans Inc. 2004-QA2 has been placed under review for possible downgrade by Moody's Investors Service.The rating action was attributed to relatively low credit enhancement levels in relation to projected losses. The alternative-A deal consists of first-lien adjustable-rate residential mortgage loans. The majority of the hybrid collateral loans are still paying at a fixed rate, while the interest rate of the certificates has been increasing monthly, according to the rating agency. "As a result, the excess spread has significantly declined, causing the overcollateralization and subordinate tranches to be more vulnerable for defaults," Moody's said.

Three tranches of mortgage- and asset-backed securities containing collateral originated by New Century Mortgage Corp. have been placed under review for possible downgrade by Moody's Investors Service.The affected securities are: class B of Asset Backed Securities Corp. Home Equity Loan Trust, series 2001-HE1; and classes B-1 and B-2 of Morgan Stanley Dean Witter Capital I Inc., series 2002-NC4. The rating actions were based on low credit enhancement levels in relation to projected losses, Moody's said. "These deals are not performing as anticipated due to the increasing cumulative loss percentage, rising delinquency rates, and declining overcollateralization," the rating agency said. The underlying collateral for the deals consists of adjustable- and fixed-rate residential mortgage loans.

Standard & Poor's Ratings Services has announced that its AA-minus ratings of Fannie Mae remain on CreditWatch Negative in the wake of the government-sponsored enterprise's recent filing with the Securities and Exchange Commission.The ratings relate to Fannie Mae's risk to the government, its subordinated debt, and its preferred stock. "While the latest update on Fannie Mae's accounting restatement process revealed some positive developments, it also disclosed an additional accounting error that was discovered as part of the restatement process," said S&P credit analyst Victoria Wagner. S&P said the new error, which involves accounting for master servicing arrangements under the Statement of Financial Accounting Standards No. 140, is not expected to have a "significant" effect on the GSE's regulatory capital. The ratings will remain on CreditWatch Negative until "critical uncertainties" are clarified, S&P said. The rating agency can be found online at http://www.standardandpoors.com.

The Federal Agricultural Mortgage Corp., Washington, has reported net income of $7.6 million ($0.67 per share) for the second quarter, compared with $8.2 million ($0.72 per share) for the second quarter of 2005.Though down from last year's second-quarter profits, the results were up from $5.0 million ($0.44 per share) in the first quarter, Farmer Mac reported. The government-sponsored enterprise touted increased business volume, attributing it mainly to diversification of its marketing focus to include large program transactions backed by growing numbers of mortgage loans to farmers, ranchers, and rural homeowners. "The combined result of second-quarter business and a $1.0 billion AgVantage securities transaction in July was to raise Farmer Mac's portfolio of loans, guarantees, and standbys to nearly $7 billion," said Henry D. Edelman, Farmer Mac's president and chief executive officer. "This record volume -- 25% above our March 31, 2006 level -- is an important measure of the increased liquidity and lending capacity Farmer Mac is providing to agricultural mortgage lenders who, in turn, extend credit to agricultural and rural America." The GSE can be found online at http://www.farmermac.com.

Franklin Credit Management Corp., a New York-based company that specializes in the purchase, servicing, and resolution of performing, re-performing, and nonperforming residential mortgage loans, has announced changes to its borrowing agreements.The company said new term loans will no longer be subject to a 50-basis-point success fee upon payoff, and that its 75-bp origination fee has been reduced to 50 bps. It also reported that its lead lending bank has agreed to reduce the interest rate margin on approximately $475 million of term debt at least 25 bps by Oct. 1 and another 25 bps by Jan. 1. Franklin Credit, which also buys, manages, and sells subprime residential mortgage assets, can be found on the Web at http://www.franklincredit.com.

The Securities and Exchange Commission has issued long-awaited guidance that should make it easier for servicers to comply with the SEC's new testing and reporting requirements on asset-backed securities, which went into effect Jan. 1."We think this new guidance really will go a long way to addressing a lot of nagging questions that people have been struggling with over the past year," said Alison Utermohlen, senior director at the Mortgage Bankers Association. Under the SEC's regulation AB (Item 1122), servicers are required to assess their compliance with a list of servicing activities and hire accountants to test the accuracy of their assessment. The written guidance, which the SEC calls "Telephone Interpretations," addresses a range of issues, including testing platforms. The SEC clarified that servicers can divide ABS by asset type (residential or commercial) for testing and reporting purposes. They can also define their testing platforms by the servicing systems they use. However, platforms have to be consistent from year to year. "If there is a change, there has to be a reasonable basis for that change," Ms. Utermohlen said.

Fannie Mae and Freddie Mac are not likely to regain their former dominance over the secondary mortgage market, according to a blueprint for the future prepared by a blue-ribbon panel of lending industry leaders.The Council to Shape Change also believes that elimination of the mortgage interest tax deduction would have a major impact on people who already own homes but would not substantially alter the playing field for future homebuyers. "There would not be a fundamental change in the manner in which borrowers finance the purchase of a home," the committee says in a wide-ranging report entitled "Outlook for the Real Estate Industry." The 182-page tome is the product of six months of meetings, deliberations, and freewheeling debate among the council's 19 members, who were appointed last October by MBA chair Regina Lowrie to help prepare the industry for expected changes over the next 10 years. The panel focused on what's likely to happen rather than what "should" happen, the report says. "This is not a policy document -- it has nothing to do with policy," said council leader Andrew Woodward, the retired chairman of Bank of America Mortgage and a former MBA chairman. "We are simply forecasting how things might shake out." The council predicts that the private-label market for residential and commercial mortgages will continue to grow significantly, regardless of what lies ahead for the government-sponsored enterprises. Fannie and Freddie will continue to focus on long-term fixed-rate products, and will rise to the occasion when there is a shock to the economy. But whenever the market drifts away from the GSEs' "sweet spot," the private-label sector's share of issuances will increase, the report says.

Indianapolis, Atlanta, and Dallas posted the three highest U.S. metropolitan foreclosure rates in the second quarter, according to RealtyTrac, an online foreclosure marketplace based in Irvine, Calif.The company's Q2 2006 U.S. Metropolitan Foreclosure Market Report ranks the foreclosure rates of the nation's 100 largest metro areas. The foreclosure rates for the three cities were 0.987%, 0.904%, and 0.891%, respectively, the company reported. "Four Texas cities now have foreclosure rates ranking among the top 10, thanks to increasing foreclosures in Austin and Houston during the second quarter," said James J. Saccacio, RealtyTrac's chief executive officer. The rest of the top 10 cities were as follows: Denver; Memphis; Stockton, Calif.; Salt Lake City; and San Antonio. RealtyTrac can be found online at http://www.realtytrac.com.