Originations

Merrill Lynch, which a year ago paid $1.3 billion for subprime giant First Franklin Financial Corp. and two affiliates, has officially pulled the plug on the unit and plans to sell FFFC's servicing division, Home Loan Services. Over the past two months, account executives at the San Jose, Calif.-based First Franklin have been telling MortgageWire that the unit was funding hardly any new loans and that a plan to retrain AEs to originate Fannie Mae loans was never implemented. At one time First Franklin -- which Merrill had purchased from National City Corp. -- ranked among the nation's top five residential subprime lenders. Among subprime servicers, the Pittsburgh-based HLS ranks sixth nationwide, according to the Quarterly Data Report. The closure will affect at least 650 workers at First Franklin and its affiliate, NationsPoint. "Since July, we have reduced staffing at First Franklin by nearly 70%, but after evaluating a number of strategies, we believe it is appropriate to discontinue mortgage origination," said David Sobotka, head of Merrill's fixed-income division. (For further details, see the March 10 issue of National Mortgage News.)

More than 200 additional classes of subprime mortgage pass-through certificates were downgraded by Fitch Ratings on March 4 as a result of changes to its subprime loss forecasting assumptions. Fitch also placed more than 100 classes of subprime pass-throughs on Rating Watch Negative and affirmed the ratings on classes with outstanding balances of more than $5 billion. The securities affected by the latest downgrades were 95 classes from six Structured Asset Securities Corp. deals, 53 classes from nine J.P. Morgan deals, 29 classes from two BNC deals, 24 classes from two Wells Fargo Home Equity Trust deals, and 11 classes from one Societe Generale Mortgage Securities Trust deal. Fitch also placed the following securities on Rating Watch Negative: 31 classes from two Saxon deals, 29 classes from two SASCO deals, 25 classes from two Asset Backed funding Corp. deals, and 18 classes from one First Franklin Mortgage Loan Trust deal. The rating actions were attributed to changes to Fitch's subprime loss forecasting assumptions that "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness." Fitch can be found on the Web at http://www.fitchratings.com.

Defeasance of commercial mortgage-backed securities loans in the United States rose 25% in 2007, as 3,000 loans with an outstanding balance of $32.4 billion were defeased, according to Moody's Investors Service. The record was mostly due to a surge in the first half of the year, which was followed by a "significant drop-off" in defeasance activity in the second half, Moody's said. Defeasance in the fourth quarter was approximately 53% lower than in the same period of 2006. "The tremendous growth of defeasance that CMBS has experienced since 2004 continued into 2007," said Sandra Ruffin, a Moody's senior credit officer. "Strong property appreciation and a robust lending environment during the first half of the year made it attractive for even relatively recently securitized loans to defease." Moody's said it expects reduced liquidity and less scope for real estate appreciation to limit defeasance volumes in the near future. The rating agency can be found online at http://www.moodys.com.

Meanwhile, an analysis released by Global Insight Inc., Waltham, Mass., found that single-family home prices fell at "a precipitous 5.1% annualized rate" in the fourth quarter. The quarterly housing valuation analysis, House Prices in America, looked at the top 330 U.S. real estate markets and found that the number of metropolitan areas deemed overvalued had fallen to 21 from the peak of 58 in 2006. The company said the most highly concentrated declines came in California, Florida, and Michigan, and the most "stubbornly overvalued" areas included Bend and Portland, Ore.; Miami; Honolulu; and Riverside-San Bernardino, Calif. "Overvaluation is being dissipated quickly across U.S. metropolitan areas, though tight credit market conditions will continue to hamper real estate markets throughout 2008," said James Diffley, group managing director of Global Insight's Regional Services Group. The analysis is a joint effort of Global Insight and National City Corp., Cleveland. More information can be found online at http://www.globalinsight.com/housingvaluation and http://www.nationalcity.com/housevaluation.

Home prices decreased at an annualized rate of 0.5% nationwide in the fourth quarter, according to the Conventional Mortgage Home Price Index Classic Series released by Freddie Mac, but the rate of decline jumps to 9.3% under a separate index based only on purchase transactions. The 9.3% annualized drop under the Conventional Mortgage Home Price Index Purchase-Only Series is the largest since the third quarter of 1972, Freddie Mac reported. (The CMHPI Classic Series is based on both home purchases and mortgage refinancings based on appraisals.) "The decline in home values occurred in every region in the U.S., according to the CMHPI Purchase-Only measure, and only four states posted gains in home values during the fourth quarter: Maine, North Dakota, South Dakota, and West Virginia," said Frank Nothaft, Freddie Mac's chief economist. "The Pacific region fell the most, at a 17.2% annualized rate, led by declines in home values in California of nearly 25% on an annualized basis." The CMHPI was jointly developed by Freddie Mac and Fannie Mae. Freddie Mac can be found online at http://www.freddiemac.com.

House Financial Services Committee Chairman Barney Frank, D-Mass., plans to circulate a bill next week that would create a government program to buy distressed mortgages that have been written down to an affordable level and meet Federal Housing Administration eligibility standards. Chairman Frank said he expects the mortgages to be purchased in an auction and that "we will buy the cheapest ones." He noted that his foreclosure prevention proposal is similar to one by the Office of Thrift Supervision, except that the government would take a "soft second" mortgage and share in any appreciation in the property. Rep. Frank has the backing of House Democratic leaders for the new program, which will require an initial $10 billion to $12 billion investment to start. He also told reporters that the bill might include a provision to shield servicers from investor lawsuits. Many servicers are reluctant to write down loans because of disgruntled investors. In related news, the committee chairman said a House/Senate conference on the FHA reform bill is going well and he expects to send the bill to the president in April.

More than 250 additional classes of subprime mortgage pass-through certificates were downgraded by Fitch Ratings on March 3 as a result of changes to its subprime loss forecasting assumptions. Fitch also affirmed the ratings on classes with outstanding balances of over $15 billion. The securities affected by the latest downgrades included 100 classes from eight Securitized Asset Backed Receivables LLC Trust deals; 56 classes from four HSI Asset Securitization Corp. Trust deals; 32 classes from two IndyMac deals; 28 classes from two Natixis deals; 28 classes from two Washington Mutual deals; seven classes from one Morgan Stanley deal; and five classes from two GSAMP deals. Fitch also placed 11 classes from one UBS MASTR Asset Backed Securities Trust deal on Rating Watch Negative. The rating actions were attributed to changes to Fitch's subprime loss forecasting assumptions that "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness." Fitch can be found on the Web at http://www.fitchratings.com.

The Winans International Real Estate Index of new-home prices in the United States has reported a 16.8% decline over the past year, its steepest decline in nearly 40 years. From its record high of 296,000 in March 2007, the index has fallen to 246,300, its worst nosedive since the 17-month decline of 17.8% from May 1969 to October 1970, Winans said. The company said the worst decline in the past 100 years was the 55% plunge recorded from 1929 to 1932. Winans can be found online at http://www.winansintl.com.

Fremont General Corp., Brea, Calif., has received notifications from two affiliated third-party purchasers of $3.15 billion of residential subprime mortgage loans alleging that Fremont is in default in connection with the loan sales. "To support the bank's obligation to repurchase any loans that were sold in the transaction, ... Fremont General provided each of the purchasers with a guaranty to honor any of the bank's obligations under such loan sale agreements," Fremont said. The company said it has failed to deliver specified financial statements and certifications as required under the covenants, but stressed that the notifications do not allege that Fremont is in breach of its obligations under the loan sale agreements. Fremont said it cannot confirm its ability to satisfy a tangible net worth covenant due to its efforts to complete its 2007 consolidated financial statements. The company said it is in discussions with the purchasers to seek a waiver of the requirement. Fremont can be found online at http://www.fremontgeneral.com.

FDIC Chairman Sheila Bair says she expects loan modifications to increase, but she is still concerned that servicers continue to rely too heavily on repayment plans. Repayment plans may be "unsustainable for borrowers and lead to delinquencies down the road and ongoing borrower distress," the Federal Deposit Insurance Corp. chairman told the Senate Banking Committee. Hope Now servicers reported that they modified 45,320 subprime loans in January and placed 48,155 subprime borrowers in repayment plans. The FDIC chairman testified that additional approaches may be needed to reduce foreclosures, including writedowns of the principal amount of the "underwater" mortgages. Meanwhile, Federal Reserve Board Chairman Ben S. Bernanke spoke favorably about an Office of Thrift Supervision proposal that would encourage writedowns by giving investors a share in future appreciation. "A writedown that is sufficient to make borrowers eligible for a new loan would remove downsize risk to investors of additional writedowns or a re-default," the Fed chairman told the annual convention of the Independent Community Bankers of America.

The U.S. District Court for the Eastern District of California has ruled against the Department of Housing and Urban Development's ban on private, seller-funded downpayment assistance. Commenting on the ruling, president and CEO of DPA pioneer Nehemiah Corporation of America, Scott Syphax called it "a major and conclusive judgment," and a heartening decision that reaffirms "that downpayment assistance is a lifeline" to the families in need. "This decision preserves access and supports the use of sensible and reasonable approaches to homeownership for millions of working-class families," he said. "As we have said before, we look forward to working with HUD to support deserving families across the country." The ban on seller-funded DPA was imposed by HUD in the Standards for Mortgagor's Investment in Mortgaged Property, published Oct. 1, 2007.

More than 300 additional classes of subprime mortgage pass-through certificates were downgraded by Fitch Ratings on Feb. 29 as a result of changes to its subprime loss forecasting assumptions. Fitch also affirmed the ratings on classes with outstanding balances of over $7 billion. The first-lien securities affected by the latest downgrades were 112 classes from 11 Carrington Mortgage Loan Trust deals; 38 classes from three GMAC Residential Funding Co. deals; 38 classes from three Credit Suisse First Boston Home Equity Asset Trust deals; 19 classes from four Residential Asset Mortgage Product Inc. deals; 13 classes from one Goldman Sachs deal; 12 classes from one New Century deal; and 12 classes from one Equifirst Loan Securitization Trust deal. The first- and second-lien securities affected were 63 classes from six Credit-Based Asset Servicing and Securitization LLC deals and 29 classes from two Asset Backed Securities Corp. Home Equity Loan Trust deals. The rating actions were attributed to changes to Fitch's subprime loss forecasting assumptions that "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness." Fitch can be found on the Web at http://www.fitchratings.com.

Fremont General Corp., the Brea, Calif.-based holding company for mortgage servicer Fremont Investment & Loan, will be removed from the S&P SmallCap 600 index after the close of trading March 3, Standard & Poor's has announced. S&P said Fremont has fallen below the $300 million minimum market capitalization required for listing on the index. As of the close of trading on Feb. 29, Fremont's capitalization stood at approximately $79 million, S&P reported. In addition, S&P said Pennsylvania Real Estate Investment Trust will be added to the SmallCap 600 after the close of trading on March 5. S&P can be found online at http://www.standardandpoors.com.

The dichotomy in the mortgage insurance world continued in January as the amount of traditional primary new insurance written held strong while the cure/default ratio tanked. The members of the Mortgage Insurance Companies of America wrote $22.2 billion of primary new insurance in January 2008, down from $25.8 billion in December but well ahead of the $16.0 billion in January 2007 (which was the worst month of the calendar year for business). Nearly all the business, $21.7 billion, came through the traditional channel, down from $22.8 billion in December (but its ninth month in a row over the $20 billion mark). But the bulk category continued to sink, with just $496 million coming through this channel, the third month of the last four in which less than $1 billion in volume was written. The number of applications received fell from 154,637 in December to 138,679 in January. Primary insurance in force continued to climb, going from $819.8 billion in December to $832.7 billion in January. The cure/default ratio sank from 54.1% in December to 51.4% in January, with 35,468 cures and 68,950 defaults.

The Eleventh Federal Home Loan District Cost of Funds Index stood at 3.970% in January, a 10-basis-point decline from 4.072% in December. The decline puts the index below the 4% level for the first time since May 2006, when it stood at 3.884%. The following month it jumped 2 bps and continued to rise until peaking at 4.996% in December 2006. In comparison, the monthly average commitment rate for the one-year adjustable-rate mortgage (as measured by the Freddie Mac Primary Mortgage Market Survey) was 5.23% in January, its lowest point since January 2006. For the 30-year fixed-rate mortgage it stood at 5.76%, its lowest level since September 2005. But the monthly numbers don't tell the whole story. The weekly results for the one-year ARM averaged between 4.98% and 5.05% for the five weeks starting Jan. 24, before rising to 5.11% in the most recent survey. The rise of the 30-year fixed-rate mortgage has been sharper, with the average climbing 76 bps since the week of Jan. 24 to 6.24% in the most recent survey.

Standard & Poor's has lowered the financial strength rating on Radian Insurance Inc., a subsidiary of Philadelphia-based Radian Guaranty Inc., by three notches, cutting it from AA-minus to A-minus. The move came two weeks after S&P put this rating and others associated with Radian Guaranty on CreditWatch with negative implications. A statement from Radian said the move by S&P was not related to the financial solvency of Radian Insurance but because of the decision to stop writing net-interest-margin security and second-lien business. (Radian Insurance does not write any insurance for first-lien loans.) In its statement, S&P said Radian Insurance "could report strong statutory net income for 2008 and 2009, but S&P believes that over the next five years, the firm's paid losses will be several times larger than the premium it collects. Radian Insurance has a sizable capital base, but it could still require support from Radian Guaranty or Radian Group because of the significant claim payments Standard & Poor's expects it will have to make in the next few years." Radian's statement in response declared that Radian Insurance "has adequate claims-paying resources to cover its losses and pay all policyholders even without the support" of its corporate parents.

Hope Now servicers modified 45,000 subprime loans in January, up 16% from December's level, and Treasury Secretary Henry Paulson said he expects the numbers to increase now that all the servicers have adopted the American Securitization Forum's protocol for fast-tracking subprime borrowers into loan modifications and refinancings. "I am pleased to announce that as of today, all of the Hope Now members that service subprime mortgages have the protocol in place, ahead of the rising volume of resets in the coming months," Secretary Paulson told the National Association of Business Economists. The Treasury secretary stressed that government-led efforts to prevent foreclosures should be focused on borrowers struggling to make their payments or facing a reset they cannot afford. And he threw cold water on a proposal to restructure "underwater" mortgages so the borrowers have an incentive to stay in their homes. "Any homeowner who can afford their mortgage payments but chooses to walk away from the underwater property is simply a speculator -- and one who is not honoring his obligation," Mr. Paulson said.

The Office of the Comptroller of the Currency will require large national banks that service mortgage loans to provide comprehensive monthly data about their portfolios. The OCC said the reporting requirement will build upon the efforts of the Hope Now alliance, a cooperative initiative among investors, mortgage servicers, and counselors to help distressed homeowners. In a letter to nine large national banks that account for the overwhelming majority of mortgages serviced by national banks, Comptroller John Dugan said the data will help the OCC assess the banks' servicing activities in light of rising loan defaults and foreclosures. The OCC said its data collection includes all mortgage loans, not just subprime loans.

Defaults on securitized subprime mortgage loans jumped to 23.3% in December, up 200 basis points from the level of the previous month and more than double the 10.1% rate of a year earlier, according to a Friedman Billings Ramsey Investment Management report. The credit performance of private-label securities backed by subprime, alternative-A, and prime mortgages is "deteriorating more rapidly and more broadly than previously," said FBRIM managing director Michael Youngblood. He attributes the acceleration in defaults to "weakening labor market conditions and falling house prices." In the 25 metropolitan statistical areas with the highest default rates, the average unemployment rate was 6% and the MSAs had a net loss of 104,240 jobs over the previous year, according to the monthly credit performance report. Meanwhile, the default rate on alt-A loans rose to 7.2% in December, up 153 bps from that of the previous month and 555 bps from the rate in December 2006. (The default rate includes loans 90 days or more past due, loans in foreclosure, and real estate-owned.)

More than 350 additional classes of first-lien subprime mortgage pass-through certificates were downgraded by Fitch Ratings on Feb. 28 as a result of changes to its subprime loss forecasting assumptions. Fitch also affirmed the ratings on classes with outstanding balances of $6 billion. The securities affected by the latest downgrades were 208 classes from 19 J.P. Morgan deals and 150 classes from 12 First Franklin deals. The rating actions were attributed to changes to Fitch's subprime loss forecasting assumptions that "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness." Fitch can be found on the Web at http://www.fitchratings.com.