Originations

Moody's Investors Service said June 15 that a host of negative rating actions it announced that day reflect the fact that second-lien subprime mortgage loans securitized in 2006 are defaulting at a "materially higher" rate than originally expected."Those loans were originated in an environment of aggressive underwriting and lack protection from home owner equity," the rating agency said. "The combination of this risk layering with slowing home price appreciation has caused significant loan performance deterioration and is the primary factor in these rating actions." The actions resulted in the downgrading of 131 securities (of which 111 remain on review for possible further downgrade), and 136 other classes were placed on review for possible downgrade, Moody's reported. The rating agency can be found online at http://www.moodys.com.

ResMae Mortgage Corp., Brea, Calif., has announced its emergence from Chapter 11 bankruptcy proceedings as a wholly owned subsidiary of RMC Mortgage Holdings.The wholesale mortgage lender said its restructuring has "refocused its sales efforts" to boost production and improve broker relationships, provided for greater efficiency and service in its origination process, and "strengthened the credit review process to increase overall loan quality." ResMae entered Chapter 11 bankruptcy in February, and later announced an agreement to sell certain assets to affiliates of Citadel Investment Group LLC. The affiliates included RMC Mortgage. ResMae can be found on the Web at http://www.resmae.com.

Subprime and alternative-A mortgage concerns appear largely responsible for a double-digit percentage decline in net income reported by the Bear Stearns Cos. in its latest fiscal quarter.The Wall Street firm saw approximately a 33% drop in net income to $362 million for the second quarter (ending May 31) vs. that of the same period a year earlier. An extraordinary noncash charge was partly responsible, but even with that item removed, Bear saw about a 10% slide in net income to $486 million from that of the second quarter of 2006. That decrease appears to be largely attributable to a 21% falloff in fixed-income revenue, to approximately $962 million, from that of a year earlier. The revenue from other major Bear business lines detailed in the company's earnings release generated lesser percentage declines or gains, the company said. An increase in expenses was also seen during the quarter. Wall Street firms were largely expected to be insulated from the subprime market's woes due to their diversification. Bear Stearns can be found online at http://www.bearstearns.com.

The incidence of overvaluation in the nation's housing market continued to decline in the first quarter, as the overall number of single-family housing units deemed to be overvalued fell from 17% to 14%, according to an analysis released by Global Insight Inc., Waltham, Mass.The quarterly Housing Valuation Analysis, which looked at the top 317 U.S. real estate markets, also found that the percentage of single-family asset value deemed overvalued fell from 33% in the fourth quarter to 25% in the first quarter. The company said the most highly concentrated declines came in California, Florida, New York, and New England. "Widespread weakness across the country is a reflection of the dramatic swing in sentiment and bargaining power between buyers and sellers," said James Diffley, 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.

Citing new survey findings, Housing and Urban Development Secretary Alphonso Jackson told a recent Wells Fargo housing symposium that there is an "urgent need for Congress to pass legislation that modernizes the FHA to help both promote and protect homeownership."The survey, released by Wells Fargo, indicates that nearly 80% support legislation that would promote and protect homeownership in America "by providing a safer, fairer and more affordable mortgage alternative to high-cost subprime loans," HUD said. Addressing the symposium in Washington, D.C., Mr. Jackson said the survey shows that a modernized Federal Housing Administration would help hundreds of thousands of subprime borrowers find an exit strategy. "Americans are in support of an FHA that could help even more first-time homebuyers and people with moderate incomes have access to safer mortgages," he said. The survey also found that about 79% of Americans in the Northeast and 75% in the West, where real estate costs are the highest in the nation, favored the FHA modernization legislation.

First-time homebuyers should be required to have escrow accounts on subprime loans, a top mortgage executive at Chase told a June 14 Federal Reserve Board hearing on abusive lending practices."Mandating it for first-time homebuyers is very important, because they generally don't understand how this stuff works," said Pablo Sanchez, national mortgage production executive at J.P. Morgan Chase. Otherwise, Mr. Sanchez and other lenders represented at the hearing urged the Fed to rely on guidance in encouraging escrows or to allow consumers to opt out. Consumer advocates, however, are urging the Fed to use its authority under the Home Ownership and Equity Protection Act to mandate escrows on subprime loans. Martin Eakes, chief executive of the Center for Responsible Lending, contends that a HOEPA regulation is needed to ensure that all lenders require escrows. "Guidance will not work," he warned.

The idea of providing borrowers with a simple one-page mortgage disclosure, first developed by American Enterprise Institute resident fellow Alex Pollock, is catching fire with state banking regulators, industry groups, and even members of Congress.Rep. Patrick McHenry, R-N.C., said he is working with Rep. Al Green, D-Texas, to draft legislation that would require mortgage lenders to provide a simple disclosure so that homebuyers understand the terms and even the costs relative to their income. "This will relieve some of the confusion in the process," Rep. McHenry told an AEI seminar. The Conference of State Bank Supervision had developed its own version, and the state regulators want the Federal Reserve Board to mandate a simple disclosure form as part its initiative to curb abusive lending practices. The Mortgage Bankers Association plans to roll out a simplified disclosure in the next few days. Loan officer trainer Christopher Cruise told the AEI seminar that Mr. Pollock's one-page form pulls together 80%-90% of the information a borrower needs to know. "Literally everybody that I have talked to in the industry strongly supports this form," Mr. Cruise said.

Class M of Lehman Brothers Floating Rate Commercial Mortgage Trust, series 2006-CCL C2, has been downgraded from Baa3 to Ba2 by Moody's Investors Service, and the ratings of classes K, L, and M have been placed on review for possible downgrade.In addition, Moody's upgraded three classes and affirmed the ratings on 12 other classes in the deal. The negative rating actions were attributed to the poor performance of the Old Salem, The Crossings at Otay Ranch, and the Walker Square & Riverbend loans. The certificates are collateralized by 12 senior participation interests secured by 14 properties.

Six classes from three Aegis Asset-Backed Securities Trust deals have been downgraded by Fitch Ratings.The downgrades were as follows: series 2003-1, class M2, from BBB-plus to BB (and placed on Rating Watch Negative), and class B1, from CC/DR3 to C/DR4; series 2003-3, class M3, from A-minus to BBB, and class B, from BBB-minus to B; and series 2004-3, class B2, from BBB to BB-plus (and removed from Rating Watch Negative), and class B3, from BBB-minus to BB-minus (and removed from Rating Watch Negative). Fitch also affirmed the ratings on nine other classes in the three transactions. The downgrades were attributed to deterioration in the relationship between credit enhancement and loss expectations. The collateral pools for both deals consist of subprime residential mortgage loans. Fitch can be found online at http://www.fitchratings.com.

Commercial and multifamily mortgage debt outstanding was up 2.5% in the first quarter to $3.001 trillion, crossing the $3 trillion threshold, according to the Mortgage Bankers Association.Multifamily mortgage debt alone rose to $741 billion, an increase of 1.6% from that of the fourth quarter. The securitization sector -- issuers of commercial mortgage-backed securities, collateralized debt obligations, and other asset-backed securities -- accounted for almost 60% of the increase in commercial and multifamily debt outstanding, the MBA reported. "Looking just at the multifamily market, CMBS, CDO, and other ABS issuers were responsible for a full 70% of the growth," said Jamie Woodwell, the MBA's senior director of commercial and multifamily research. Although commercial banks are reported holding the largest share of the debt outstanding, their holdings include loans on commercial properties, as well as loans backed by commercial real estate. The MBA can be found online at http://www.mortgagebankers.org.

Housing sales remained sluggish in most parts of nation in late April and May, according to the Federal Reserve's latest report on economic conditions.Most of the 12 Federal Reserve district banks characterized their housing markets as "soft or weak," the Fed's Beige Book says. The San Francisco bank said new- and existing-home sales fell in most areas, with modest price declines in some parts of the district. The Atlanta bank said sales stabilized in parts of Florida but continued to decline in Georgia. "No district reported an increase in new home construction," the Fed said. In contrast, commercial real estate markets continued to strengthen, and all the district banks that mentioned commercial construction gave "positive reports," according to the Beige Book.

The average 30-year fixed mortgage rate rose from 6.53% to 6.74% for the seven-day period ended June 14, its highest level since July 2006, according to Freddie Mac's Primary Mortgage Market Survey.The average 15-year fixed mortgage rate rose from 6.22% to 6.43%, the average rate for five-year Treasury-indexed hybrid adjustable-rate mortgages climbed from 6.24% to 6.37%, and the average rate for one-year Treasury-indexed ARMs rose from 5.65% to 5.75%, Freddie Mac reported. Fees and points averaged 0.4 of a point for fixed-rate mortgages, 0.5 of a point for hybrid ARMs, and 0.7 of a point for one-year ARMs. "Mortgage rates moved sharply upward this week, with rates on 30-year fixed-rate mortgages jumping more than 20 basis points, the largest upward movement in over three years," said Frank Nothaft, Freddie Mac's chief economist. "These moves parallel rising yields on Treasury securities, as concerns about inflation pressures and continuing strength of consumer and business spending have dimmed hopes for an interest rate cut." A year ago, the average 30-year and 15-year fixed rates were 6.63% and 6.25%, respectively, and the average hybrid and one-year ARM rates were 6.23% and 5.66%, Freddie Mac said. Freddie Mac can be found online at http://www.freddiemac.com.

Subprime wholesaler First Franklin Financial Corp., San Jose, Calif., has entered the alternative-A market and plans to securitize the loans through its parent company, Merrill Lynch.In an interview with MortgageWire, FFFC president and chief executive Andrew Pollock said the nonprime lender had been planning the menu expansion for a year. It began accepting the loans on June 11. Mr. Pollock said he anticipates that alt-A loans could account for about 10% of the company's volume this year. (In 2006, FFFC funded $27.6 billion in subprime loans, ranking ninth nationwide, according to the Quarterly Data Report.) FFFC funds loans through a network of 20,000 approved brokers. (For more details, see the June 18 issue of National Mortgage News.)

Mortgage disclosures currently required by federal regulators fail to convey key mortgage costs and terms to consumers, leaving them susceptible to deceptive lending practices, according to a Federal Trade Commission study that tested 819 recent mortgage customers.The FTC study found that prime and subprime mortgage customers were confused by the standard good-faith estimate and would benefit from enhanced disclosures. The consumer protection agency tested a prototype GFE with enhanced disclosures that produced better results. "Eighty percent of the respondents viewing the prototype form were able to answer 70% or more of the questions correctly, compared to 29% of the respondents viewing the current form," the FTC said. The study also suggests that subprime borrowers "may benefit the most from improved disclosures," FTC Chairman Deborah Platt Majoras said.

Lehman Brothers said Wednesday that it will merge its subprime and alternative-A mortgage units into a single business and trim 400 positions over the next 30 to 90 days.A year ago rumors began to surface that a merger between the two divisions -- BNC Mortgage, Irvine, Calif., and Aurora Loan Services of Denver -- was afoot, but the company denied it. BNC is a wholesale funder, Aurora both a wholesaler and a correspondent buyer. Lehman executive Thomas Wind will manage the combined company, and BNC chief executive Steven Skolnik will run the wholesale lending operation for subprime and alt-A products. Mr. Skolnik will remain in Irvine. The correspondent lending division will remain in Denver at the Aurora location. Mr. Wind noted that the residential lending unit's loan production is up quarter to quarter and added that the merger does not reflect an effort to cut back expenses. "We see a great opportunity to grow as others have cut back and consolidated," he said. Mr. Wind oversees residential lending for Lehman Brothers.

Freddie Mac resumed quarterly reporting for the first time since 2002, citing a net loss of $211 million ($0.46 per share) that it attributed primarily to mark-to-market losses on its derivatives portfolio and credit spread widening.Freddie Mac also reported that it recorded net income of $2 billion ($2.80 per share) in the first quarter of 2006. Richard Syron, Freddie Mac's chairman and chief executive officer, noted that "[h]ousing prices declined, mortgage credit tightened, and credit spreads and OAS spreads widened" in the first quarter, which he termed a "very challenging period" for the housing and mortgage markets. "As you can see in our GAAP and fair-value results, we were affected by these changes," he said. "Despite these headwinds, Freddie Mac gained ground last quarter." Guaranteed portfolio volumes rose 16% on an annualized basis, resulting from a shift in mortgage originations back to long-term fixed-rate products, which Mr. Syron characterized as Freddie Mac's "sweet spot." The increase "has enabled us to regain some share from the private-label market and to grow at twice the rate of the market as a whole," he said. "Importantly, we have achieved this growth while maintaining a more cautious view than most towards credit risk. This has helped our aggregate credit statistics, such as delinquencies, to stay lower than the market as a whole."

Washington Real Estate Investment Trust, Rockville, Md., has announced the commencement of a consent solicitation to amend the financial covenants in the indenture governing its outstanding unsecured notes.The company said the amendment would change the definition of total assets to give the REIT's more flexibility in incurring debt. It would enable the company to access debt capital more efficiently and align its debt covenants with those of many other investment-grade REITs, the company said. The REIT can be found online at http://www.writ.com.

NorthStar Realty Finance Corp., a New York-based real estate investment trust, has announced the pricing of a private offering of $150 million of exchangeable senior notes issued by its operating partnership, NorthStar Realty Finance LP.The offering had an initial exchange rate of 59.1935 common shares per $1,000 principal amount of the notes, representing an exchange price of approximately $16.89 per common share, the REIT reported. The initial purchasers have been granted an option to buy up to $22.5 million in additional notes to cover any overallotments. The REIT can be found online at http://www.nrfc.com.

The Market Composite Index, an overall measure of mortgage applications, rose from 625.3 to 666.5 on a seasonally adjusted basis during the week ended June 8, according to the Mortgage Bankers Association's Weekly Mortgage Applications Survey.On an unadjusted basis, applications increased 17.4% on the week and were up 16.1% from the level recorded a year earlier. The Purchase Index rose from 433.6 to 464.7 on a seasonally adjusted basis, while the Refinance Index climbed from 1757.1 to 1854.8. Refinancings represented 38.0% of total applications, unchanged from the previous week, while adjustable-rate mortgages accounted for 18.7%, the MBA said. The average contract interest rate for 30-year fixed-rate mortgages jumped from 6.35% to 6.61%, and points (including the origination fee) fell from 1.50 to 1.44 for loans with 80% loan-to-value ratios, the association reported. The MBA can be found online at http://www.mortgagebankers.org.

More than 176,100 foreclosure filings were reported nationwide in May, up 19% from the level recorded in April and up nearly 90% from that of a year earlier, according to RealtyTrac, an online foreclosure marketplace based in Irvine, Calif.The nation's foreclosure rate stood at one foreclosure filing for every 656 households, the company said in its May 2007 U.S. Foreclosure Market Report. (Foreclosure filings include default notices, auction sale notices, and bank repossessions.) "After a barely perceptible dip in April, foreclosure activity roared back with a vengeance in May," said James J. Saccacio, chief executive officer of RealtyTrac. "Such strong activity in the midst of the typical spring buying season could foreshadow even higher foreclosure levels later in the year." The company said Nevada, Colorado, and California recorded the highest foreclosure rates in May. The company can be found online at http://www.realtytrac.com.