Servicing

Two classes of the GE Home Equity 1997-HE 3 transaction have been downgraded by Fitch Ratings.The downgrades were as follows: class B-1, from BBB-minus to BB-minus; and class B-2, from CC to C. In addition, the ratings on two classes in the deal were affirmed, and another remains on Rating Watch Negative. Fitch said credit support for class B-2 has been depleted due to losses, and the bond took a principal writedown on Aug. 25. "Although the transaction's structure allows for the writedown amount to be repaid from future recoveries, the structure does not allow for interest on the written-down amount to be repaid," the rating agency said. The downgrade of class B-1 was attributed to loss levels and high delinquencies in relation to applicable credit support. Fitch can be found online at http://www.fitchratings.com.

The ratings on nine classes from two manufactured housing transactions linked to Conseco Finance Corp. have been lowered by Standard & Poor's Ratings Services and removed from CreditWatch with negative implications.The downgrades in Manufactured Housing Contract Senior/Sub Pass-Through Certificates, series 2002-1, are as follows: class A, from AAA to A-plus; classes M-1-A and M-1-F, from AA-minus to BBB; class M-2, from A-minus to BB; and class B-1, from BBB to B-plus. The downgrades in Manufactured Housing Contract Senior/Sub Pass-Through Certificates, series 2002-2, are as follows: class A-2, from AAA to A-plus; class M-1, from AA to A-minus; class M-2, from A to BBB-minus; and class B-1, from BBB to BB-minus. S&P attributed the downgrades to the poor performance of the underlying pools of manufactured housing contracts and the resulting decline in credit enhancement. The rating agency said recovery rates on liquidated collateral have "plummeted" for both deals since Conseco has become more reliant on a wholesale liquidation strategy after suspending its MH financing business and filing for bankruptcy in December 2002. S&P can be found online at http://www.standardandpoors.com.

Credit Suisse First Boston was the buyer of most of the manufactured housing-backed bonds that blew a hole in the Federal Home Loan Bank of New York's balance sheet this quarter, a source familiar with the matter has told MortgageWire.As of MW's deadline, CSFB had yet to comment on the matter. The bonds had a face value of about $1 billion, and the FHLBank said recently that it lost $183 million on the sale. Conseco and Oakwood Homes were the issuers of the bonds, a source noted. Conseco went bankrupt and is no longer in business, and Oakwood recently filed for bankruptcy protection. Fannie Mae also invested in some of Conseco's asset-backed bonds.

Meanwhile, Federal Housing Finance Board Chairman John Korsmo has told a House panel that the deterioration in the credit quality of the New York FHLBank's manufactured housing assets is "a concern."Mr. Korsmo told the House Financial Services Committee that the agency is monitoring the situation and that the New York FHLBank stopped paying dividends "to protect retained earnings." He added that the Finance Board has issued guidance to all FHLBanks to review the adequacy of their retained earnings.

The Federal Home Loan Bank of New York will not pay a dividend to its shareholders in the third quarter due to a $183 million loss on the sale of its troubled investments in manufactured housing securities.The FHLBank sold $1.033 billion of MH securities that were not insured and had been downgraded from their original triple-A ratings. "To ensure that there would be no further deterioration, the Bank has now sold this portfolio and has no uninsured exposure to the manufactured housing sector," FHLBank president Alfred DelliBovi says in a letter to shareholders. In August, Standard & Poor's warned that the bank's triple-A credit rating might be downgraded due to problems with its MH investments. Mr. DelliBovi also announced that the bank would postpone its conversion to a risk-based capital system that was scheduled to go into effect Oct. 1. The FHLBank's capital ratio of 4.68% is "well above" the minimum capital-to-assets ratio of 4.0%, the Sept. 24 letter says. "The Bank also expects its retained earnings will continue to be positive at September 30, 2003." (The FHLBank had $240 million in retained earnings at the end of the second quarter.)

Meanwhile, a leading academic has told Congress that Freddie Mac's "Doty Report," an internal investigation into the company's earnings restatement scandal, is "too forgiving" in parts.Testifying before the House Energy and Commerce subcommittee on commerce, trade and consumer protection Thursday morning, Professor Baruch Lev of the Stern School of Business at New York University said, "You read parts of the report and get the impression that no harm was done." Although he called the Doty Report "outstanding" in general, he then proceeded to criticize parts of it. The report's author, attorney James Doty of Baker Botts, also testified before the subcommittee, repeating some of the report's key findings, and blaming the scandal partly on Freddie Mac's over-reliance on outside auditors. Released early this summer, the report concludes that the company's previous management engaged in a campaign to manage earnings by abusing accounting rules. In one instance, Freddie Mac executives took actions to hide a $1.5 billion gain in its derivatives portfolio. In another instance, executives shifted $30 billion in securities (in which the company had an unrealized loss) to a third party over several hours in order to recognize a one-time loss and offset real gains elsewhere. (See the Sept. 29 issue of National Mortgage News for full details.)

Freddie Mac has pushed back the release date for its restated financial results to November and announced that the cumulative increase in retained earnings is expected to be $4.5 billion or more.However, the government-sponsored enterprise cautioned that neither the restatement nor the re-audit process is complete, and therefore the cumulative effect could differ from that estimate. "We regret the need to extend our restatement deadline of Sept. 30, but our number one priority has been -- and continues to be -- getting our financial statements right," said Martin F. Baumann, Freddie Mac's executive vice president for finance and chief financial officer. He said the delay "does not result from new accounting errors," but from a need for computer system modifications, additional data processing, and validation of the results. The need for the additional work was uncovered during the final review of asset transfers and securitizations, Mr. Baumann said. Freddie Mac said all the accounting corrections expected to be addressed in the restatement still fall in the five categories identified in its June 25 announcement on the subject: security classification; accounting for derivative instruments; asset transfers and securitizations; valuation of financial instruments; and all other corrections.

Three classes of Deutsche Financial Capital manufactured housing transactions have been downgraded by Fitch Ratings.The downgrades were as follows: series 1997-I, class B-I, from B to CCC; and series 1998-I, class B-1, from CCC to C, and class B-2, from C to D. In addition, the ratings on 12 other classes from the two deals were affirmed. Fitch said DFC was a joint venture of Deutsche Financial Services Corp. and Oakwood Acceptance Corp. Contracts included in the transactions are serviced by OAC, a wholly owned subsidiary of Oakwood Homes Corp., which filed for Chapter 11 bankruptcy protection on Nov. 15, 2002, the rating agency said. Fitch can be found on the Web at http://www.fitchratings.com.

In the nation's most populous state, delinquencies increased in the second quarter while the percentage of loans in foreclosure declined.That's according to the California Mortgage Bankers Association, which reported that the delinquency rate for mortgage loans on one- to four-unit residential properties rose 7 basis points to 2.73% in the second quarter. The percentage of loans in which foreclosure was started fell 3 bps to 0.15%, while the percentage of loans in the foreclosure process fell 9 bps to 0.37% in the second quarter.

Responding to new trends in the industry, Fitch Ratings says it will place increased emphasis on monitoring the outsourcing of some commercial mortgage servicing functions.Specifically, Fitch said it will pay more attention to the review of quality control procedures and management oversight practices to ensure that the functions are being performed effectively. "Fitch views traditional outsourcing of commercial mortgage servicing functions as a viable alternative for servicers looking to improve the quality of their operations and decrease costs," said Stephanie Petosa, a senior director at Fitch. "To ensure that servicing quality is maintained, Fitch's review and analysis focuses on ongoing oversight procedures, documented training programs, and performance metrics." Fitch can be found online at http://www.fitchratings.com.