Originations

The U.S. attorney in New York has subpoenaed Fannie Mae and Freddie Mac as part of an investigation into whether fraud contributed to the demise of these now government-owned mortgage investing giants. According to public filings, Fannie and Freddie said they face ongoing investigations from both the U.S. attorney and the Securities and Exchange Commission. The two agencies are seeking information about their accounting, financial disclosures, and corporate governance. Freddie said the subpoena it received involved matters for the period Jan. 1, 2007, to the present. Both companies -- which are operating under federal conservatorships -- said they will cooperate with the investigations. Besides the Fannie and Freddie probes, the FBI has launched preliminary investigations into the downfall of Lehman Brothers and American International Group. In addition, more than 20 subprime firms are the subject of criminal investigations by the government. The government seized control of Fannie and Freddie on Sept. 7.

Vertice, the wholesale lending operation of Wachovia Corp., Charlotte, N.C., which was once run by former Mortgage Bankers Association chairman John Robbins, will be making the transition to Citigroup, according to a company spokeswoman. Although Vertice operated under the Wachovia Securities banner, it is part of the parent's corporate and investment group, she explained. (Wachovia did not sell Wachovia Securities or Evergreen Asset Management as part of the deal.) In after-hours trading, before the markets opened, Wachovia's common stock was down to $0.94 per share after closing at $10 on Sept. 26. As of midday on Sept. 29, it had not started to trade. Vertice combined American Mortgage Network, the San Diego-based wholesaler formed by Mr. Robbins, with another Wachovia wholesale operation. Mr. Robbins recently retired as managing director and special counsel for Wachovia Securities. He had not been responsible for the day-to-day operations at Vertice for a couple of years.

By purchasing Wachovia Corp., Citigroup -- which is receiving federal aid on the deal -- will pick up additional market share in both residential lending and servicing, challenging Bank of America, Chase, and Wells Fargo for the top perch in the industry. Among servicers, Wachovia had a 2.09% market share. In lending, Wachovia's share was much higher -- 3.89%. When the dust settles from the recent spate of acquisitions, the mortgage industry will have four $1 trillion-plus servicers: Bank of America ($2.09 trillion), Wells Fargo ($1.50 trillion), Chase ($1.45 trillion), and Citigroup ($1.02 trillion). Early Monday morning the Federal Deposit Insurance Corp. announced that Citigroup would buy the ailing Wachovia through an "open bank transaction" in which no federal money will be provided at first but the agency is potentially on the hook for Wachovia's mortgage losses -- most of which are tied to risky payment-option adjustable-rate mortgages. By agreeing to buy Wachovia, Citigroup will absorb the first $42 billion in losses on a $312 billion pool of loans. "The FDIC will absorb losses beyond that," the agency said in a statement. To compensate the government for bearing the risk of potential losses, the FDIC was given $12 billion worth of Citigroup preferred stock and options.

Citing continued deterioration in the housing market, Los Angeles-based homebuilder KB Home has reported a net loss of $144.7 million ($1.87 per share) for the fiscal quarter ended Aug. 31, compared with a net loss of $35.6 million ($0.46 per share) a year earlier. The company noted that, excluding $443 million of income from the company's discontinued French operations and the sale of those operations, it took a loss of $478.6 million ($6.19 per share) from continuing operations. The results included a pretax noncash charge of $82.2 million for inventory and joint-venture impairments and a charge of $58.1 million to record a valuation allowance against net deferred tax assets generated during the quarter, the company said. Jeffrey Mezger, the company's president and chief executive officer, said deterioration in the demand for new homes and the availability of mortgage credit "have now been exacerbated by the recent, unprecedented turmoil in financial and credit markets, and it is too early to assess whether the federal government's proposed interventions will be effective." The company can be found online at http://www.kbhome.com.

Class H of Morgan Stanley Capital I Inc. commercial mortgage pass-through certificates, series 1998-XL, has been downgraded from BBB-minus to BB-minus by Fitch Ratings and placed on Rating Watch Negative. Fitch also affirmed the ratings on five other classes in the deal. The downgrade was attributed to an increase in expected losses from a real-estate-owned asset, the Charlestowne Mall in St. Charles, Ill.

Class L of J.P. Morgan Chase Commercial Mortgage Securities Corp. series 2006-FL2 has been placed on Rating Watch Negative by Fitch Ratings. Fitch also affirmed the ratings on 14 other classes in the transaction. The negative rating action was attributed to the forthcoming maturity risk associated with one loan, the SOMA Portfolio, which is secured by four hotels in San Francisco. "Three extension options are available ... [but the] loan does not currently meet the performance hurdle required for extension," the rating agency said.

Two classes from two small-balance commercial mortgage-backed securities deals issued by of CBA Commercial Assets LLC have been downgraded by Fitch Ratings. Class M-5 of series 2004-1 was downgraded from BB to B, and class M-6 of series 2007-1 was downgraded from BB-plus to BB-minus. Class M-5 of series 2007-1 was placed on Rating Watch Negative, and the ratings of 13 other classes in the two deals were affirmed. The negative rating actions were attributed to an increase in specially serviced loans and loss expectations.

Urstadt Biddle Properties Inc. has announced that it will be added to the S&P SmallCap 600 Index after the close of trading on Sept. 26. Urstadt is a real estate investment trust based in Greenwich, Conn.

Equity One Inc., North Miami Beach, Fla., has priced a public offering of 2.2 million shares of common stock at $21.47 per share. The real estate investment trust said the underwriters have been granted an option to buy up to 330,000 additional shares to cover any overallotments. Merrill Lynch & Co., Deutsche Bank Securities, and J.P. Morgan Securities were the joint book-running managers for the offering. The shopping center REIT can be found online at http://www.equityone.net.

Realty Income Corp., Escondido, Calif., has priced an offering of 2.7 million shares of common stock at $26.82 per share. Realty Income said the offering will raise net proceeds of approximately $69 million, which will be used to repay the outstanding principal amounts of two series of notes. The joint book-running managers of the offering are Raymond James & Co. and UBS Securities LLC. The company can be found online at http://www.realtyincome.com.

Corporate Office Properties Trust, Columbia, Md., has announced the pricing of 3.25 million shares of newly issued common stock at $39 per share. The company said it has granted the underwriters an option to buy up to 487,500 additional shares to cover any overallotments. Raymond James, Banc of America Securities LLC, Citi, and J.P. Morgan Securities Inc. are the joint book-running managers for the offering. The company, a real estate investment trust, can be found on the Web at http://www.copt.com.

The possibility of a partial sale of Washington Mutual Inc. has prompted downgrades of WaMu by Standard & Poor's Ratings Services and Fitch Ratings. S&P downgraded WaMu's counterparty credit rating from BB-minus/B to CCC/C, though it affirmed the BBB/A-3 counterparty credit rating on Washington Mutual Bank, citing "the breadth of its retail franchise." S&P attributed the downgrade to "the increased likelihood that a potential sale of the company may not involve the whole company, which increases the risk of default for holding company creditors." Fitch downgraded WaMu's long-term Issuer Default Rating from BBB-minus to B-minus and placed the company and its subsidiaries on Rating Watch Evolving, citing "the heightened uncertainty associated with WaMu's debt obligations in light of the difficult market conditions and increasingly limited options to bolster capital." A partial sale "would likely be detrimental to WaMu's holding company creditors and potentially to unsecured debtholders at the bank level because they are effectively subordinated to depositors and the considerable amount of secured financing," Fitch said.

StreetLinks National Appraisal Services, Indianapolis, has announced an "industry-exclusive" Certificate of Non-Influence that warrants the objectivity of real estate appraisals procured on behalf of its clients. The certificate provides assurance to homeowners, lenders, investors, and Wall Street that the accompanying real estate appraisal was obtained via an independent process, the company said. StreetLinks guarantees that the appraiser remains anonymous to those who could try to sway an objective valuation. "Given the widespread concern over the role that appraiser coercion may have played in the current mortgage market turmoil, our Certificate of Non-Influence assures every stakeholder in the mortgage loan that our valuation was derived according to the strictest standards of objectivity without influence to inflate the appraised value," said StreetLinks chief executive Steve Haslam. "The value of a certified non-influence process will be evidenced in enhanced loan performance." The company can be found online at http://www.streetlinks.com.

The 7th Circuit Court of Appeals has struck down the class certification in a closely watched lawsuit by a Wisconsin couple who maintained that they didn't understand the initial 1.95% teaser rate was only for one month when they took out a payment-option adjustable-rate mortgage from Chevy Chase Bank. A U.S. district court judge ruled in favor of Bryan and Susan Andrews in their request to rescind the loan under the Truth in Lending Act and certified a class action lawsuit. But circuit judges reversed the class certification and said the right of rescission is an individual remedy and that Congress did not intend to leave lenders exposed to class actions costing hundreds of millions of dollars. "Using a class action to resolve a multitude of individual, varied rescission claims is neither 'economical' nor 'efficient' in any sense of those terms," the opinion says.

Existing-homes sales totaled 4.91 million units in August on an annualized basis -- a 2.2% decline from the level recorded in July -- as mortgage financing became more expensive and Americans continued to worry about their jobs. According to figures compiled by the National Association of Realtors, resales fell 10.7% from the level of a year earlier. The bad news on home sales came as Federal Reserve Chairman Ben S. Bernanke told a joint committee of Congress that U.S. "economic activity appears to have decelerated broadly," adding that new unemployment claims "are at elevated levels." Noting that the national unemployment rate is now 6.1%, the Fed chairman added that "real after-tax income has fallen this year." Traditionally, mortgage lenders rely on strong employment to drive home sales. The NAR and other trade groups believe that the government's bailouts of Fannie Mae and Freddie Mac have already caused interest rates to fall, which will make home financing more affordable. "With higher [loan limits for the government-sponsored enterprises and the Federal Housing Administration] and a beefing up of the FHA program, all the mechanisms have been falling into place to increase mortgage availability," said NAR chief economist Lawrence Yun.

Class L of Bear Stearns commercial mortgage pass-through certificate series 2004-BBA3 has been placed on Rating Watch Negative by Fitch Ratings. The rating action stems from the forthcoming (Nov. 12) maturity of the transaction's remaining loan, Riverside Center, which has no remaining extension options, Fitch said. The Riverside Center is secured by a retail shopping center in Utica, N.Y.

The master servicer rating of The Bank of New York Mellon has been upgraded from RMS2-plus to RMS1-minus by Fitch Ratings. Fitch attributed the action to BNYM's "strong oversight and monitoring of its primary servicers, its continued investment in enhancing its technology, and its increasing use of automation." The company's master servicing operation is based in New Albany, Ohio. Fitch rates residential servicers on a scale of 1 to 5, with 1 being the highest rating. The rating agency can be found online at http://www.fitchratings.com.

Healthcare Realty Trust Inc., a real estate investment trust based in Nashville, Tenn., has announced the pricing of 7 million shares of newly issued common stock at $25.50 per share. The company said it plans to use the estimated net proceeds of $170.5 million to invest in recently closed and expected acquisitions of medical office and other outpatient-related facilities and for general corporate purposes. The company has granted the underwriters an option to buy up to 1.05 million additional shares to cover any overallotments. The joint book-running managers for the offering are Wachovia Securities, J.P. Morgan, Banc of America Securities LLC, and UBS Investment Bank. The REIT can be found on the Web at http://www.healthcarerealty.com.

Nominal home prices were down 10.9% nationally in July from the level recorded a year earlier, according to the latest LoanPerformance Home Price Index. Los Angeles-Long Beach-Glendale topped the index's list of statistical areas experiencing 12-month home price declines, recording a 27.95% decrease. Oakland-Fremont-Hayward (Calif.) ranked second with a 27.28% decline, and Riverside-San Bernardino-Ontario (Calif.) finished third at 26.93%. "The recent price trend is similar to the Massachusetts and Texas house price declines in the 1980s and 1990s that took approximately two years to bottom out," said Mark Fleming, chief economist of First American CoreLogic, the Santa Ana, Calif.-based company that compiles the index. "In both cases there was stabilization in the rate of decline before the lengthy recovery in price levels." The LoanPerformance HPI provides monthly home price indices and median sales prices covering 7,575 ZIP codes and 676 counties in all 50 states and the District of Columbia, the company said. First American CoreLogic can be found online at http://www.facorelogic.com.

The current credit crisis has eclipsed the savings-and-loan crisis of the late 1980s as the most consequential event for the U.S. real estate industry in the past 20 years, according to a survey by DLA Piper, an international law firm. The firm said 90% of the 424 top commercial real estate executives who responded to the survey described their 12-month outlook for the U.S. CRE market as "bearish," up sharply from 68% in October 2007. "On the heels of the Lehman bankruptcy, the unprecedented government bailouts of Bear Stearns, Fannie Mae, Freddie Mac, and AIG, and the historic proposal of a $700 billion financial institutions bailout plan, we remain in a very fluid situation in the capital markets that likely will continue to bog down the U.S. commercial real estate market until financing finally becomes available on a predictable basis again," said Jay Epstien, chair of DLA Piper's U.S. real estate practice. DLA Piper can be found online at http://www.dlapiper.com.