S&P Puts Mortgage Bonds on Watch

The triple-A rating on Frederick City, Md.'s FHA-insured mortgage lien bonds, Series 1993A has been placed on CreditWatch with negative implications by Standard & Poor's.The action stemmed from a payment default on the mortgage note under the trust estate. The rating agency said it has been notified that "certain funds that were held by the servicer for the payment of mortgage insurance and taxes are no longer available to the trustee, as the servicer has filed for bankruptcy." After the bankruptcy filing the borrower had been making mortgage payments directly to the trustee, but "there are approximately $57,000 in funds that were misallocated by the servicer" prior to the filing, S&P said. In a typical default, the trustee may file for insurance if the mortgage payment is not received, but "in this case, HUD has claimed that since the payment was made by the borrower (although not received by the trustee) this is not an insurable event," the rating agency said. The trustee, which is pursuing legal remedies under the trust estate, says there are sufficient funds to pay debt service for the next two payment dates, S&P said. S&P's website address is http://www.ratings.standardpoor.com.