Originations

House prices declined 1.4% in October and were down 6.1% on a year-over-year basis, according to the Standard & Poor's/Case-Shiller housing price index that covers 20 metropolitan statistical areas.Eleven of the 20 MSAs recorded their largest monthly decline since January 2000, according to Robert Shiller, chief economist at MacroMarkets LLC. "No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim," Mr. Shiller said. Only three MSAs -- Charlotte, N.C. (4.3%), Seattle (3.3%), and Portland, Ore. (1.9%) -- continued to experience price appreciation since October 2006. "Atlanta and Dallas finally entered into negative territory with declines of 0.7% and 0.1%," the Case-Shiller report says. Meanwhile, Miami posted a 12.4% decline in prices, the highest of the 20 MSAs, and surpassed Tampa, Fla., for the first time. Prices in Tampa had declined by 11.8% over the previous 12 months.

Mortgage bankers funded $61.6 billion of payment-option adjustable-rate mortgages in the third quarter, a 37% decline from the level recorded a year earlier, according to figures compiled by National Mortgage News and the Alternative Products Quarterly Data Report.Every single lender answering the survey reported a double-digit percentage decline in fundings, ranging from 33% to 99%. Countrywide Financial Corp., Calabasas, Calif., ranked first among option ARM funders, originating $23.4 billion, a 56% decline from the volume in the third quarter of 2006. Wachovia Bank, Charlotte, N.C., ranked second with $8.8 billion, and Washington Mutual, Seattle, third with $7.5 billion. (WaMu's figure is an estimate.) Results may be incomplete because some firms would not provide an option ARM number.

Merrill Lynch & Co. -- which took $7.9 billion of writedowns on subprime and collateralized debt obligation assets in the third quarter -- may take an additional $10 billion in charges in the fourth quarter, according to a new research report issued by Sandler O'Neill.Sandler's estimate comes two days after Merrill sold a "passive" stake in itself to Temasek Holdings, a Singapore company, and Davis Selected Advisors, New York, for $6.2 billion. On Christmas Eve, Merrill sold most of its commercial finance operation to GE Capital for an undisclosed price. The sale, however, will free up about $1.3 billion in capital. The commercial unit is not involved in commercial mortgage lending. In its research report, Sandler called Merrill's equity sale a "necessary evil," noting that "we updated our expected CDO and subprime marks to $10 billion from $3.5 billion and estimated that [Merrill's] tangible equity ratio could fall to an uncomfortably low 2.2%."

Merrill Lynch has slashed the number of account executives employed by its subprime production division by 60% (400 positions) since late August, according to former and current employees of the company.One source, requesting anonymity, said FFFC -- which Merrill bought in early 2007 -- now employs 300 AEs nationwide, compared with 700 in the early summer. AEs gather loans through approved mortgage brokers. One AE source said FFFC has 180 AEs working on the East Coast and 120 on the West Coast. He noted, however, that November and December production volumes have been paltry, with Merrill cutting FFFC's menu offerings significantly. A spokesman for Merrill Lynch would only say that "we have adjusted our staffing levels to be in accordance with current business requirements." The Merrill spokesman declined to comment on changes in FFFC's loan menu.

Fitch Ratings also issued a flurry of news releases Dec. 21 regarding various rating actions, including over 40 downgrades, on mortgage-backed securities from six issuers.Among the downgraded securities were 20 classes from Morgan Stanley subprime issues in 2002, 2003, and 2004; eight classes of Aegis mortgage pass-through certificates; and five classes of Structured Asset Investment Loan mortgage pass-throughs. The downgrades were attributed to deterioration in the relationship between credit enhancement and expected losses. Fitch can be found on the Web at http://www.fitchratings.com.

Over 260 classes of mortgage-backed securities from 22 issuers were downgraded by Fitch Ratings on Dec. 21 as a result of changes to its subprime loss forecasting assumptions.Fitch also affirmed the ratings on classes with outstanding balances of approximately $27 billion. Among the securities affected by the latest downgrades were: 42 classes of Structured Asset Investment Loans mortgage pass-through certificates; 35 classes of Ameriquest, Argent, and Park Place mortgage pass-throughs; 31 classes of Soundview Home Equity Loan Trust asset-backed certificates; 15 classes from three Bear Stearns Asset-Backed Securities issues; 13 classes of Fremont Home Loan Trust mortgage pass-throughs; 13 classes of NovaStar mortgage pass-throughs; 12 classes of WaMu asset-backed certificates; 12 classes of Citigroup Mortgage Loan Trust mortgage pass-throughs; 11 classes of Option One mortgage pass-throughs; and 11 classes of People's Choice Home Loan mortgage pass-throughs. The rating actions were attributed to changes in 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."

Standard & Poor's has announced that Extra Space Storage Inc., a real estate investment trust specializing in self-storage properties, will replace First Indiana Corp. in the S&P SmallCap 600 index after the close of trading Dec. 31.The REIT, a constituent of the S&P REIT Composite Index, is based in Salt Lake City. The reason for the change is that First Indiana is being acquired by Marshall & Ilsley, a component of the S&P 500. S&P can be found online at http://www.standardandpoors.com.

Twenty-five classes of mortgage-backed securities from three issuers have been downgraded by Fitch Ratings as a result of changes to its subprime loss forecasting assumptions.Fitch also placed nine classes on Rating Watch Negative and affirmed the ratings on classes with outstanding balances of nearly $1 billion. Securities affected by the latest downgrades were as follows: 11 classes from two issues of GSAMP mortgage pass-through certificates; seven classes from two issues of Structured Asset Securities Corp. mortgage pass-throughs; and seven classes of Asset Backed Funding Corp. mortgage pass-throughs. The rating actions were attributed to changes in 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."

The ratings of MBIA Inc. and its financial guaranty subsidiaries have been placed on Rating Watch Negative by Fitch Ratings as a result of MBIA Insurance Corp.'s exposure to subprime mortgage collateral.MBIA Inc.'s long-term and debt ratings stand at AA, and the insurer financial strength ratings of MBIA Insurance and MBIA's other financial guaranty subsidiaries stand at AAA. The rating agency said the action followed the completion of an updated assessment of MBIA Insurance's exposure to structured finance collateralized debt obligations backed by subprime mortgage collateral, as well as MBIA's exposure to residential mortgage-backed securities. Fitch said slower growth through 2008 "should help improve the company's capital position," but added that MBIA recently "began to get more competitive in the sectors suffering material credit deterioration, and it is many of these transactions that are causing the problems for the company today." Fitch can be found online at http://www.fitchratings.com.

Cleveland-based KeyCorp has announced that it expects a record number of charges for the fourth quarter, including some related to its homebuilder loan portfolio and its past exit from the subprime mortgage business.However, Key also reported that its board has increased the company's dividend for first-quarter 2008 by 2.7% to $0.375 per common share. "Key has been well positioned to weather this unprecedented volatility in the credit markets as we exited the subprime home mortgage business more than a year ago," said Henry L. Meyer III, KeyCorp's chairman and chief executive officer. "Further, we have no meaningful [collateralized loan obligation, collateralized debt obligation, asset-backed commercial paper, or specialized investment vehicle] exposure, and we moved two years ago to sharply curtail our Florida condominium exposure." However, Key's homebuilder loan portfolio has been hurt by the downturn in the U.S. housing market, and its participation in the capital markets has hurt market values and, therefore, financial results, he said. The company can be found online at https://www.key.com.

Friedman Billings Ramsey Group Inc., Arlington, Va., has decided not to pay a cash dividend for the fourth quarter, instead using the money to buy back its common stock.The company's board increased the size of the buyback from 50 million shares to 100 million shares. (FBR has already repurchased 23.6 million shares under the authorization.) Regarding its First NLC Financial Services subsidiary, the company said one of the impediments to the recapitalization deal for the subprime lender has been removed with court approval of a negotiated settlement of class-action litigation. However, FBR said it cannot predict when the other closing conditions will be met or the deal will be completed. FBR also announced that it has sold $153 million of nonprime nonsecuritized loans originated by FNLC for proceeds of $135 million. FBR will recognize an $18 million loss on the transaction in the fourth quarter. It still has $48 million of such loans, which it is in negotiations to sell. The company said it will take an additional $20 million loss from the sale of the loans, or if the sale does not go through, take a writedown for the same amount in the fourth quarter. FBR can be found on the Web at http://www.fbr.com.

The market share of fixed-rate mortgages among all mortgage originations jumped in the first half of 2007, according to the latest Mortgage Bankers Association originations surveys.Fixed-rate loans (including interest-only loans) accounted for 53.4% of first mortgages (or 67.4% based on the number of loans) in the first half compared with 46.2% (or 60.5%) in the second half of 2006, the MBA reported in its Mortgage Originations Survey. Meanwhile, the MBA's Subprime Mortgage Originations Survey found that the FRM share of subprime mortgage originations grew from 25% in the second half of 2006 to 31% in the first half of 2007. Other first-half results from the overall survey included findings that IOs accounted for 31.1% of all originations, compared with 28.5% in the second half of 2006, and that first-time homebuyer purchases represented 26.9% of home purchases, unchanged from that of the second half of 2006. Among first-half originations, 37.1% were for single-family attached homes, 58.5% for single-family detached homes, 0.7% for manufactured and mobile homes, and 3.8% for two- to four-unit structures, according to the trade group. The MBA can be found online at http://www.mortgagebankers.org.

The downturn in home values will likely persist through next year, though signs of stabilization are emerging, according to the chief economist of the National Association of Home Builders.NAHB chief economist David Seiders says home values will likely start to turn upward again early in 2009, with a 10%-15% decline in home prices from the peak of the cycle in 2005 to the trough. On the plus side, lower prices and low mortgage interest rates are reviving housing affordability, Mr. Seiders said during an annual year-end housing forecast call. Mr. Seiders, acknowledging that the housing downturn has been more severe than he predicted, said the meltdown in the housing finance market was the chief reason that home sales and prices have suffered more than expected. Still, he said improved housing affordability and low interest-rates are laying the groundwork for recovery. "Demand has weakened dramatically, but we are looking at tentative signs of stabilization," he said. The NAHB can be found online at http://www.nahb.com.

ARC Systems, a decisioning vendor based in Austin, Texas, that has been in the mortgage space for 23 years, will officially cease operations on Dec. 31.ARC is credited as the first to introduce an automated underwriting system for subprime mortgages. A few months ago, company founder and chief executive Ed Jones announced that he would be looking for a buyer, but none has shown interest to date, he told MortgageWire. "The market is scared to death," he said. "A lot of vendors are hurting more than they're willing to admit. We don't know what the market will look like when it comes back, either." Mr. Jones attributes the closure to a loss in revenue due to the fact that their major clients either went out of business or shed their correspondent channel. The company can be found online at http://www.arcsystems.com.

Former alternative-A giant Impac Mortgage Holdings posted a $1.2 billion loss in the third quarter, $790 million of it tied to markdowns on various types of collateral, including derivatives.The company -- whose shares now trade for about 60 cents each -- is expected to file for bankruptcy protection within the next two months, according to executives close to the lender. Impac is no longer funding nonconforming loans, but originated $261 million in agency product during the quarter. Its balance sheet includes $19.4 million in assets, which threw off interest income of $313 million in the third quarter. Impac, echoing statements made by several other players in the business, blamed its problems on "deteriorating market conditions, higher delinquencies, and higher severities." The company also said its executive vice president and chief financial officer, Gretchen Verdugo, resigned effective Nov. 30 but was given a $200,000, six-month consulting contract. Impac can be found online at http://www.impaccompanies.com.

Standard & Poor's has announced two changes to the S&P SmallCap 600 index involving companies in the real estate and thrift industries.Guaranty Financial Group Inc., Austin, Texas, will replace Ashworth Inc. in the index after the close of trading on Dec. 28. Guaranty Financial operates a federally chartered savings bank and an insurance company. In addition, Forestar Real Estate Group, an Austin-based real estate investment and development company, will replace MIVA Inc. in the index after the close of trading on Dec. 28. Both Guaranty Financial and Forestar are being spun off by Temple-Inland Inc., an Austin-based manufacturer of paper and building materials. S&P can be found online at http://www.standardandpoors.com.

Sixty classes of mortgage-backed securities from four issuers have been downgraded by Fitch Ratings as a result of changes to its subprime loss forecasting assumptions.Fitch also placed seven classes on Rating Watch Negative, removed two classes from Rating Watch Negative, and affirmed the ratings on classes with outstanding balances of approximately $6.8 billion. Securities affected by the latest downgrades were as follows: 28 classes from five issues of SAIL mortgage pass-through certificates; 26 classes from eight issues of Morgan Stanley mortgage pass-throughs; five classes from one issue of Saxon Asset Securities Trust mortgage pass-throughs; and one class of SASCO mortgage pass-throughs. The rating actions were attributed to changes in 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."

The long- and short-term Issuer Default Ratings of Canadian Imperial Bank of Commerce have been placed on Rating Watch Negative by Fitch Ratings, which cited the bank's exposure to subprime residential mortgage-backed securities.The bank's IDRs stand at AA-minus/F1-plus. (Certain other ratings of CIBC and Canadian Imperial Holdings Inc. were also placed on Rating Watch Negative.) CIBC has "significant exposure" to U.S. collateral debt obligations composed largely of subprime RMBS, and its portfolio has been hedged with credit default swaps, Fitch reported. A "significant portion" of the swap protection, $3.5 billion, was written by a now-weak financial guarantor, and the bank will "most likely take a significant charge" against the exposure, Fitch said.

The Issuer Default Rating of Centro NP LLC (formerly New Plan Excel Realty Trust) has been downgraded from BBB-plus to CCC by Fitch Ratings due to financial difficulties at its parent company, Centro Properties Group, an Australian real estate investment trust.In addition, Centro NP's revolving bank credit facility and its senior unsecured notes have been downgraded from BBB-plus to CC/RR6, and all ratings remain on Rating Watch Negative. (Fitch's Recovery Ratings are "a relative indicator of credit recovery prospects" on an obligation in an issuer's capital structure in the event of a default.) The financial difficulties at Centro Properties relate to the refinancing of over $2.3 billion of debt due to dislocations in the credit markets, Fitch said. Centro Properties can be found on the Web at http://www.centro.com.au.

The Individual rating of Fifth Third Bancorp has been lowered from A/B to B by Fitch Ratings, which cited concerns about the company's exposure in its home equity and commercial mortgage portfolios, among other factors.The rating outlook for Fifth Third has been revised from stable to negative, although its long- and short-term Issuer Default Ratings have been affirmed at AA-minus/F1-plus. The negative rating actions stem from "deteriorating trends in asset quality and expectations for higher credit costs that will continue to pressure earnings," Fitch said. (Individual ratings, assigned only to banks, assess how a bank would be viewed if it could not rely on external support, and are designed to assess a bank's exposure to and management of risk, Fitch says.) The rating agency said there had been "broad-based deterioration" in net chargeoffs and nonperforming assets since March. "While Fitch had anticipated some deterioration given the Midwestern footprint and exposure to residential and construction lending, the unprecedented stress (particularly in Florida) and difficult market conditions exceeded Fitch internal estimates and support Fitch's outlook revision," the rating agency said.