Origination

Eight classes of subprime mortgage pass-through certificates from two issuers were downgraded by Fitch Ratings on June 9. The affected securities were as follows: seven classes from two Option One deals, and one class from a Long Beach deal. Fitch also affirmed the ratings on over 60 classes from 29 subprime transactions.

Defaults on loans in commercial mortgage-backed securities remained low in 2007, totaling $1.2 billion (22 basis points) of $535 billion of CMBS loans outstanding, according to an annual study by Fitch Ratings. The rating agency reported that the 10-year cumulative default rate totaled 7.4%, down from that of previous studies. Fitch said it expects CMBS loan defaults to rise, however, as "solid real estate fundamentals" are affected by the slowing economy and limited capital availability.

Fitch Ratings has downgraded the Issuer Default Ratings of eight homebuilders and affirmed the IDRs of four others. The downgrades were as follows: Lennar Corp., from BBB to BBB-minus; Pulte Homes Inc., BBB to BBB-minus; Centex Corp., from BBB to BB-plus; D.R. Horton Inc., from BBB-minus to BB-plus; Ryland Group Inc., from BBB-minus to BB-plus; Meritage Homes Corp., from BB-minus to B-plus; M/I Homes Inc., from BB-minus to B-plus; and Beazer Homes USA Inc., from B-plus to B. Beazer's ratings remain on Rating Watch Negative, and the Rating Outlooks for the other homebuilders' ratings remain negative. The downgrades reflect the "difficult housing environment and Fitch's expectations that housing activity will be even more challenging than previously anticipated during the balance of calendar 2008 and that new-home activity will still be on the decline well into 2009." The rating agency also cited negative trends in the companies' operating margins, further deterioration in their credit metrics, and erosion in their tangible net worth from noncash real estate charges. Fitch also affirmed the IDRs of the following homebuilders: NVR Inc., at BBB; Toll Brothers Inc., at BBB; KB Home, at BB-plus; and Hovnanian Enterprises Inc., at B-minus. The Rating Outlook is stable for NVR and negative for the other three.

Mortgage Network Inc., Danvers, Mass., has announced plans to expand its wholesale operations in North Carolina, South Carolina, Tennessee, Georgia, and Alabama. The company also announced the hiring of mortgage veteran Thomas Palmer as its national wholesale manager. Mr. Palmer was most recently senior vice president and channel executive for correspondent lending at Bank of America Securities. He was previously senior vice president and channel director for correspondent national sales at Washington Mutual/Fleet Mortgage. Mortgage Network said it has opened eight new offices in the past 12 months and increased its staff by over 33%. The company can be found on the Web at http://www.mortgagenetwork.com.

Residential Finance Corp., a nationwide mortgage lender, has announced plans to hire 75 to 100 people in the third quarter, the majority of them to fill positions in the company's Columbus, Ohio, headquarters and its office in Tampa, Fla. "The slowdown in the housing market has put more than 200 U.S. lending operations out of business, leaving nearly 1,000 talented mortgage professionals jobless in Ohio, and even more in Florida," said company president Michael Isaacs. "We'd like to invite those seasoned loan officers with extensive mortgage banking experience and a commitment to excellence to give us a call." Residential Finance said its mortgage professionals receive 25 hours of intense mortgage training, including team training in its proprietary "incubator," a simulated classroom environment where experienced trainers provide additional training support. The company can be found online at http://www.myrfc.com.

Lehman Brothers expects to see a net loss of $2.8 billion in its fiscal second quarter (which included the extreme market dislocation seen in March) but says it was able to make progress in reducing troubled residential and commercial mortgage exposures during the quarter. The company also estimates that it will take a $3.7 billion net loss for mark-to-market adjustments on partially mortgage-related holdings for the quarter ended May 31. Chairman and chief executive Richard Fuld said he was "disappointed" by the company's expected first-ever quarterly net loss, but added that he was heartened by Lehman's "strengthened balance sheet and the improvement in financial markets since March." Lehman Brothers can be found on the Web at http://www.lehman.com.

To stem losses to the FHA insurance fund, the Department of Housing and Urban Development is reissuing a proposed rule that would ban seller-funded downpayment assistance on Federal Housing Administration-insured mortgages. HUD has been tangling for several years with nonprofit groups that arrange for low-income homebuyers to receive downpayment assistance from home sellers. HUD maintains that foreclosures on these FHA loans are three times higher than for other loans because the seller jacks up the price to recoup the downpayment "gift." In March, a federal district court judge ruled that HUD violated the Administrative Procedures Act in issuing a similar rule to stop seller-funded DPA programs. FHA Commissioner Brian Montgomery said the judge provided HUD with a "roadmap" to modify the proposed rule and reissue it for a new 60-day comment period. The FHA commissioner also told the National Press Club Monday that the FHA has booked $4.6 billion in "unanticipated long-term losses" mostly due to seller-funded DPA loans. He stressed that the FHA is solvent but may need a congressional appropriation if such losses continue. Meanwhile, downpayment assistance providers are ready to block the rule again. "We will not watch Commissioner Montgomery or HUD sever the only lifeline available to the low- to moderate-income families," said Scott Syphax, president and chief executive of Nehemiah Corporation of America.

Increasing demand for Federal Housing Administration-insured loans has pushed the FHA's market share above 10%, and loan endorsements in the first eight months of fiscal year 2008 already exceed the total for all of fiscal 2007. "Since September 2007, FHA has helped pump more than $76.1 billion in mortgage activity into the housing market," FHA Commissioner Brian Montgomery said, and $30.3 billion of those loans have helped conventional borrowers refinance into FHA loans. The FHA endorsed 424,700 mortgages totaling $59.8 billion in fiscal 2007 when subprime lenders were still taking customers away from the agency. Since the subprime meltdown last year, the FHA's market share has risen from 3% to 10%-12%, Mr. Montgomery told the National Press Club. The latest FHA activity report shows mortgage applications running at a 2.1 million annual rate during the last two weeks of May, compared with an annual rate of 777,900 in the same period of fiscal 2007. FHA loan endorsements are running at a 1.36 million annual rate, up 130% from that of a year ago.

Sixty-three classes of subprime mortgage pass-through certificates from nine issuers were downgraded by Fitch Ratings on June 6. The affected securities were as follows: 17 classes from nine Delta Funding deals; 10 classes from four Asset-Backed Securities Corp. deals; eight classes from three First Franklin Mortgage Loan Trust deals; seven classes from three CDC Mortgage Capital Trust deals; six classes from two Wilshire deals; four classes from one Ameriquest Mortgage Securities deal; four classes from two Equity One deals; four classes from two Ameriquest Mortgage Securities Inc. deals; and three classes from one CSFB deal. Fitch also affirmed the ratings on over 70 classes from 41 subprime transactions.

Commercial mortgage-backed securities are being mispriced based on an "irrational" market reaction that presents "significant arbitrage opportunities" for investors, according to a new study released by the Commercial Mortgage Securities Association. The study, which performed multiple stress tests on CMBS based on three historical and worst-case recession scenarios, predicts that CMBS will perform well in a recessionary environment and concludes that current spreads for most vintages are "far wider" than warranted by their fair value. "There are no skeletons in the CMBS closet," said Jun Han, the author of the study. "Market fears and the liquidity crunch have dramatically distorted the value of commercial mortgage-backed securities, creating one of the best environments in history for investing in CMBS." The study was presented at the CMSA's 14th annual convention in New York. The association can be found online at http://www.cmbs.org.