Servicing

Freddie Mac is reminding lenders that it will not tolerate lending practices that reward borrowers for quickly refinancing loans.The secondary-market agency has found that some mortgage brokers and originators promise to cover several monthly mortgage payments if the borrower agrees to take out a high-interest-rate loan and refinance within a few months. Freddie Mac is warning for the second time that such arrangements violate the representations and warranties lenders sign when they sell a loan to Freddie. And Freddie Mac could require repurchase of such loans or take other actions against the lender. Freddie previously raised objections to these practices in an April news release. Now the agency has issued an industry letter to underscore its concerns. "We expect seller/servicers to monitor prepayment levels of the mortgages they have sold to Freddie Mac, and to notify their Freddie Mac account manager if they become aware of circumstances likely to result in unusually high prepayment rates of these mortgages," the Sept. 1 industry letter says.

Freddie Mac expects to see price declines in some hot housing markets and is limiting purchases of interest-only and option adjustable-rate mortgages, according to the company's president and chief executive Richard Syron."Along with many other informed observers, we do anticipate some cooling in the hotter markets," Mr. Syron told investors and Wall Street analysts during an Aug. 31 conference call on the mortgage company's first- and second-quarter financial results. "And indeed, we are prepared to see some retracing in house prices in some of these markets where gains, quite frankly, outpaced the underlying economic drivers." The CEO also said the government-sponsored enterprise is purchasing IOs and option ARMs, but is keeping its credit exposure very low and forfeiting market share. "We understand that we are trading some volume of business today because we chose to avoid unduly compromising our credit and pricing discipline," Mr. Syron said. Such restraint is appropriate for a GSE with a special housing mission, and it is the "right approach" for the company's shareholders, he added.

Freddie Mac -- which is almost current on its earnings releases -- has reported that first-half 2005 profits tumbled by 60% as net interest income fell and the company recorded a massive loss on its derivatives.Freddie released its earnings after the market closed Aug. 31, and in trading Sept. 1 its stock fell more than $2 a share, setting a new 52-week low of $58.05 per share. The government-sponsored enterprise, which earned $1.64 billion in the first half, also reported that guarantee fee and "contractual management" income rose to $720 million (16.4 basis points), compared with $635 million in the first half of 2004. Annualized, its "g-fee" income fell to 15.8 bps, compared with 16.6 bps a year ago. Freddie took a $747 million derivatives loss in the first half, compared with a gain of $521 million in the year-ago period. Sandler O'Neill maintained its "hold" rating on Freddie, saying "we remain cautious until we have increased comfort and visibility in the core earnings power of the company with additional financial disclosures."

ECC Capital Corp., a real estate investment trust based in Irvine, Calif., has announced the completion of a $1.03 billion securitization of subprime mortgage loans.Encore Credit Receivables Trust 2005-3 contains 14 classes of notes, including what the REIT said would be deemed by investors the equivalent of a net-interest-margin security. "With the class N notes, we were able to monetize approximately $34.5 million of residual cash flow at a 5% yield, which is lower than the implied cost of funding those cash flows with our equity," said John Kohler, executive vice president of ECC Capital. "And in a traditional structure, we would not have received residual cash flow until the required overcollateralization was built up." The joint lead managers of the deal were Wachovia Capital Markets LLC and Countrywide Securities Corp., and the co-manager was Credit Suisse First Boston LLC. ECC Capital, a mortgage finance REIT, can be found online at http://www.encorecredit.com.

HomeBanc Corp., the Atlanta-based parent company of HomeBanc Mortgage Corp., has announced the completion of a $1.09 billion securitization of adjustable-rate mortgage loans.The sequential-pay notes were issued by HomeBanc Mortgage Trust 2005-4, which includes approximately $1.12 billion of first- and second-lien ARMs originated by HomeBanc Mortgage. The floating interest rates on the various classes of notes are based on the one-month London interbank offered rate. HomeBanc Corp. said it retained approximately $43.1 million of the notes as well as a certificate representing the right to receive any residual distributions. The underwriters of the deal are Bear, Stearns & Co.; JPMorgan Securities; and KeyBanc Capital Markets. HomeBanc, a real estate investment trust, can be found online at http://www.homebanc.com.

Fitch Ratings has reported that the impact of Hurricane Katrina may adversely affect certain Fitch-rated commercial mortgage-backed securities deals.The rating agency said it has identified 18 transactions with greater than a 5% property concentration in the area, with concentrations ranging as high as 52%. Fitch said it is especially concerned with the following 12 transactions, which provide limited or no credit support to Fitch-rated classes: ASC 1996-MD6, CALFS 1997-CTL1, CSFB 2004-C2, EPT 2003-EPR, GECMC 2000-1, GMACC 2001-C1, MSCI 2005-XLF, NLFC 1998-1, RMF 1997-1, SLCMT 1997-C1, TIAA 1999-1, and WBCMT 2004-WHL3. Since CMBS borrowers are required to carry property insurance in the United States, Fitch said it expects "minimal losses" because repair costs will ultimately be covered. The rating agency said it has contacted the master servicers of the affected transactions and expects to begin receiving property status reports in the next two weeks. Fitch can be found online at http://www.fitchratings.com.

Mortgage insurers have announced that they are working with lenders and investors to provide relief to insured borrowers who were victims of Hurricane Katrina.Genworth Financial, Richmond, Va., said it will support guidelines to allow the reduction or suspension of mortgage payments for a specified time or even create a longer payment schedule. "We want to help the people hit so hard by these storms and protect their credit ratings and financial interests," said Kevin Schneider, president of Genworth's U.S. mortgage insurance business. AIG United Guaranty, Greensboro, N.C., following Fannie Mae and Freddie Mac (as previously reported), said it will work with servicers whose borrowers have encountered hurricane damage, including those with no flood insurance. United Guaranty said it will agree to delays of foreclosure for up to six months, the capitalization of up to six mortgage payments, and modification and forbearance arrangements that allow a borrower up to 18 months to bring a mortgage current.

Three subordinate tranches from two subprime mortgage transactions issued by Metropolitan Asset Funding Inc. have been placed under review for possible downgrade by Moody's Investors Service.The affected classes are classes B-2 and B-3 of series 1999-B and class M-2 of series 2000-A. The rating actions were based on the weaker-than-expected performance of the mortgage pools and the resulting erosion of credit support, Moody's said. Overcollateralization in the 1999-B deal is "almost completely depleted" and the class B-3 certificates are likely to experience losses in the near future, the rating agency reported. In addition, overcollateralization in the 2000-A deal has been "fully exhausted," the class B-1 certificates have been fully written down, and the class M-2 certificates have realized losses. The pools are backed by first-lien fixed-rate subprime mortgage loans, including a "significant" amount of seller-financed loans and loans with small average balances, Moody's said. The rating agency can be found online at http://www.moodys.com.

Fidelity National Financial Inc., Jacksonville, Fla., has announced that its Fidelity National Property and Casualty Insurance Group Catastrophe Team has established a dedicated, around-the-clock hotline for reporting claims related to Hurricane Katrina.The company noted that prompt reporting of claims will enable the catastrophe team to assist policyholders in scheduling inspections of their property. The team consists of Fidelity National Insurance Co., Fidelity National Property & Casualty Insurance Co., and Fidelity National Indemnity Insurance Co. The hotline number for both agents and policyholders is 866-397-6347. FNF can be found on the Web at http://www.fnf.com.

Fannie Mae and Freddie Mac are providing mortgage relief for borrowers facing hardships related to the massive and widespread damage caused by Hurricane Katrina.Fannie Mae mortgage lenders are authorized to suspend mortgage payments for up to three months, reduce payments for up to 18 months, and, in more severe cases, create longer loan payback plans. Lenders will determine appropriate relief steps by considering any uninsured losses, extended unemployment, and extraordinary expenses related to Katrina that affect mortgage payments. Under Freddie Mac's policies, servicers may reduce or suspend mortgage payments for up to 12 months for borrowers in declared major-disaster areas. Freddie is also encouraging servicers to expedite the release of insurance proceeds, waive the assessment of penalties or late fees, and not report forbearance or delinquencies caused by the disaster to the nation's credit bureaus. Freddie also announced that it is donating $50,000 to the American Red Cross to support hurricane relief efforts, and that the Freddie Mac Foundation is matching Freddie Mac employee donations to relief efforts (and will double the match if donations support Habitat for Humanity's hurricane relief efforts).