Origination

Three classes of Merrill Lynch Mortgage Trust commercial mortgage pass-through certificates, series 2004-Key2, have been downgraded by Moody's Investors Service. The downgrades were as follows: class M, from B1 to B2; class N, from B2 to B3; and class P, from B3 to Caa2. The rating agency also affirmed the ratings on 16 other classes in the transaction. Moody's attributed the downgrades to estimated losses from specially serviced loans and increased dispersion. Moody's can be found on the Web at http://www.moodys.com.

Zacks.com, Chicago, has highlighted its #5 (Strong Sell) ranking on the stock of Lehman Brothers Holdings Inc. and its #4 (Sell) ranking on the stock of Merrill Lynch & Co. The company noted that Lehman filed for Chapter 11 bankruptcy protection on Sept. 15. "The company, which was trying to finance several risky assets with little capital, became the largest bankruptcy in U.S. history and also the highest-profile casualty of the global credit crisis." Merrill Lynch, which has agreed to be acquired by Bank of America, has posted over $40 billion in writedowns and credit losses in the past year, Zacks said. "Additional writedowns are expected in coming quarters at the world's largest retail brokerage if economic conditions do not improve," the research firm said. Stocks with a #5 (Strong Sell) or a #4 (Sell) rank should be sold or avoided in the next one to three months, according to Zacks. The company can be found online at http://www.zacks.com.

The third-quarter Core Mortgage Risk Index, which forecasts the relative risk of residential loan delinquencies, stands 12% higher than it did a year ago, according to First American CoreLogic, Santa Ana, Calif. The risk index has risen for 11 of the late 12 quarters, the company said. "The CMRI is currently 55% above the base period of the first quarter of 2002, a period near the end of the last U.S. economic recession," said Mark Fleming, the company's chief economist. "Although significantly higher now than during this base period, the CMRI is likely to continue rising nationally over the next 18 months." Mr. Fleming said declining home prices are the "primary factor" in the most recent rise in mortgage risk. CoreLogic, a provider of mortgage risk assessment and fraud prevention systems, can be found on the Web at http://www.facorelogic.com.

Fitch Ratings has revised its Rating Watch on American International Group Inc. and its subsidiaries from Negative to Evolving following the federal rescue of the ailing insurance giant. Fitch said it views the move as favorable overall because it "alleviates significant near-term liquidity concerns and provides a source of funding for potential future collateral requirements that are primarily derived from AIG's AIG Financial Products Corp. subsidiary." Fitch said it also believes the arrangement "provides a platform of stability for AIG's primary operating subsidiaries and significantly curtails substantive pressure on AIG to sell assets quickly to fund potential cash calls." The downside is the "effective subordination of essentially all" AIG's senior debt and hybrid instruments, Fitch said. The rating agency said AIG's "most pressing challenges" are likely to evolve from meeting immediate liquidity needs to managing higher financial leverage.

"Advertising is definitely an issue" for state regulators, attorney Bonnie S. Nachamie told attendees Thursday at the New York Association of Mortgage Brokers annual convention in Melville, N.Y. The New York Banking Department has hired an advertising specialist, and state regulators are not just looking for compliance with state laws in this area, but federal ones as well. Ms. Nachamie said the banking department has "new friends" at the Federal Trade Commission. The FTC, the New York Banking Department, and the Department of Housing and Urban Development are all chatting with each other and making referrals. Another area where the banking department is spilling over into a federal issue involves mortgage brokers who are doing Federal Housing Administration loans without having a "mini-eagle," she said. There is also a crackdown by state regulators on mortgage brokers who take applications at unlicensed locations. Ms. Nachamie also warned the audience that mortgage brokers are not exempt from making a Home Mortgage Disclosure Act filing if they have 100 applications per year. This has not been on the regulators' radar screen in the past, but the issue is starting to come up.

With house prices continuing to fall, the banking system will face a "rough period" until the housing market begins to stabilize in the middle of 2009, according to Peter Hooper, chief economist at Deutsche Bank. "The banking system has worked through a substantial portion of losses, but there is a great deal more to come and there is great uncertainty related to how far home prices fall," Mr. Hooper told reporters at an American Bankers Association news conference. Mr. Hooper, who chairs the ABA's economic advisory committee, stressed that house prices are a "critical issue" underlying the financial turmoil and concern about the valuation of financial assets. He said he expects housing prices to begin to level off in the second quarter or the middle of next year. "Things begin to look better at that point," the chief economist said. Meanwhile, more bank economists on the ABA's advisory committee are expecting the economy to dip into a "mild recession" during the second half of this year, Mr. Hooper said. In June, a majority of the economists thought economic growth would be slow but that the United States would avoid a recession. The ABA can be found on the Web at http://www.aba.com.

Two classes of Morgan Stanley Capital I Inc. commercial mortgage pass-through certificates, series 1999-FNV1, have been downgraded by Fitch Ratings. Class K was downgraded from B to B-minus/DR1, and class L was downgraded from CCC/DR3 to CC/DR4. Fitch also affirmed the ratings on 10 other classes in the transaction. The rating agency said the deal contains two specially serviced assets.

Reznick Group PC, an accounting firm based in Bethesda, Md., has announced the formation of Reznick Capital Markets LLC in New York City to expand its services for real estate clients. Reznick Capital will provide services for transactions ranging from joint-venture funding for commercial and mixed-use portfolios to single developments requiring capitalization, Reznick said. Ken Baggett, managing principal and chief executive of Reznick Group, said the new company plans to partner with third-party brokers nationally and internationally. Rob Sternthal has joined Reznick from Credit Suisse as president and managing director of Reznick Capital. The parent company can be found on the Web at http://www.reznickgroup.com.

Activity is slowing in the commercial real estate market in response to tightening credit and weak economic growth, according to the National Association of Realtors. In its latest Commercial Real Estate Outlook, the NAR reports that financing problems stemming from the crisis on Wall Street, not a lack of demand, are curbing real estate transactions. "Although capital remains available for residential loans, the credit crunch is pronounced in commercial lending," said NAR chief economist Lawrence Yun. "Combined with a slowing economy, the lack of credit is curtailing activity in the commercial real estate sectors. As a result, there's been a slowdown in the net absorption of space, which is leading to higher vacancies and more modest rent growth." The association can be found on the Web at http://www.realtor.org.

The House Financial Services Committee has approved a bill that would allow nonprofit housing groups to continue to arrange downpayment assistance on Federal Housing Administration loans and give the FHA some latitude in pricing mortgage insurance premiums based on risk. The bill (H.R. 6694) would reverse provisions in a major housing bill Congress passed this summer that bans seller-funded downpayment assistance on FHA loans starting Oct. 1 and bars the FHA from using risk-based pricing for 12 months. The House is expected to pass the bill despite opposition from the Department of Housing and Urban Development. HUD has been trying to shut down the DPA programs for years because of high default and claim rates. When it comes to RBP, the department contends that the bill is too restrictive. "The RBP portion of the bill would make permanent the recently enacted [12-month] moratorium, which HUD strongly opposed, and place very tight restrictions on FHA's pricing structure," the department said. "HUD does not support it." The House is expected to pass H.R. 6694, but it will die in the Senate, according to industry lobbyists.