Servicing

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.

Moody's Investors Service has announced that, unlike Standard & Poor's Ratings Services and Fitch Ratings, it will continue to rate some residential mortgage-backed securities containing home loans defined as high-cost by the New Jersey Home Ownership Act.Moody's said, however, that the way it assesses the risk of high-cost home loan refinances will likely "eliminate their inclusion in future deals." The rating agency also said it will generally accept loan pools where no more than 2% of loans are high-cost New Jersey home loans, as long as those loans are purchase loans that "fit neatly within clear, objective standards for compliance." It set less strict requirements for covered home loans, a category defined by the law as being between high-cost home loans and home loans. For home loans that are not high-cost or covered loans, Moody's said it would only require appropriate due diligence for inclusion in RMBS transactions.

The high rate of residential foreclosures in Arizona is likely to continue as rising interest rates "cool briefly resurgent home price appreciation" in the Phoenix-Mesa metropolitan area, according to Foreclosures.com.Alexis McGee, president of the Sacramento, Calif.-based property investment advisory firm, said the market was nearly flat in the Phoenix-Mesa area in the first quarter, with price appreciation registering 3.4%. "We saw that move up to 6.8% year over year at the end of June," Ms. McGee said. "Then interest rates took off in July. That will knock home prices back down, and we expect defaults to increase again in coming months." Ms. McGee said many homeowners have been using their homes like ATM machines to pay off credit cards and buy expensive items like automobiles. "When rates go up and the price curve flattens out or declines, they find themselves trapped with more debt than they can handle," she said. The firm can be found on the Web at http://www.foreclosures.com.

Three classes of Structured Finance Advisors Collateralized Asset Backed Securities Trust II have been downgraded by Fitch Ratings.The downgrades were as follows: class B notes, from AA-minus to BBB-plus; class C notes, from BBB to B; and preference shares, from BB-minus to CCC. Class C and the preference shares were also removed from Rating Watch Negative, and the triple-A rating on class A was affirmed. SFA CABS II is a collateralized debt obligation supported by residential and commercial mortgage-backed securities, general asset-backed securities, and CDOs, Fitch said. The downgrades "reflect the ongoing downward migration in the credit quality of the portfolio," the rating agency said. Fitch can be found on the Web at http://www.fitchratings.com.