Originations

Gramercy Capital Corp., New York, has set up a real estate securities business that will focus on the acquisition, trading, and financing of commercial mortgage-backed securities and other real estate-related securities.Joseph Romano, formerly a CMBS portfolio manager with TIAA-CREF, has joined Gramercy's external adviser as senior vice president to head the newly formed group, Gramercy reported. Initially, Gramercy will be targeting between $500 million and $1.0 billion of investments that will include CMBS, real estate investment trust debt, credit default swaps, preferred securities, and other real estate securities. The new business line is expected to complement Gramercy's lending platform by enabling it to obtain term financing for fixed-rate loans originated by Gramercy. "Having built a very successful direct commercial real estate lending franchise, we believe this is the right time in the company's evolution to launch its real estate debt securities platform," said Marc Holliday, Gramercy Capital Corp.'s chief executive officer.

The incidence of overvaluation in the nation's housing market continued to decline in the fourth quarter, as the overall number of single-family housing units deemed to be overvalued declined from 17% to 16%, 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 (representing 91% of the single-family housing market), also found that the percentage of single-family asset value deemed overvalued fell from 31% in the third quarter to 28% in the fourth quarter. "Nearly all markets posted a decline in the level of overvaluation, which signals that the overall housing market is beginning to trend back to more normal price growth," said Jeannine Cataldi, senior economist and manager of Global Insight's Real Estate Service. 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.

Accredited Home Lenders, San Diego, says it has received a $200 million loan commitment -- at 13% -- from entities managed by Farallon Capital Management, San Francisco.In connection with the loan, Accredited will issue Farallon 3.3 million warrants in a private placement, with an exercise price equal to $10 per share. In trading Tuesday, Accredited's shares were up 23% to just over $11. The loan carries a five-year term and can be repaid by Accredited at any time subject to conditions and prepayment fees. The nation's 12th-largest subprime lender said the loan will enhance its liquidity. The company is also in the process of selling $2.7 billion in mortgages -- but at a $150 million loss, a move that also is designed to bolster its cash position. Accredited can be found online at http://www.accredhome.com.

Proposed federal underwriting guidance could create "questionable distinctions" between prime and subprime borrowers that would cut off credit to some subprime borrowers in the name of consumer protection, according to mortgage banking attorneys at K&L Gates."The natural consequence is that prime borrowers are encouraged, or at least permitted, by national housing policy to seek to finance the purchase of a home, but subprime borrowers are subjected to more rigid restrictions," the K&LG attorneys point out in an alert to clients. The proposed guidance would require lenders to underwrite adjustable-rate mortgages for subprime borrowers at the fully indexed rate, while prime borrowers would continue to qualify at the lower teaser rate. "The imposition of differing standards for subprime vs. non-subprime borrowers raises many concerns, not the least of which is that such a practice may result in a disparate impact on borrowers based upon categorizations protected under the fair lending laws," the alert says.

As part of an FHA reform bill, House Financial Services Committee Chairman Barney Frank, D-Mass., wants to cross-subsidize mortgage insurance premiums for subprime borrowers by tapping into higher revenues generated by changes to the FHA reverse mortgage program.The chairman said he plans to take up FHA reform soon that also eliminates a cap on Home Equity Conversion Mortgage originations and raises the HECM loan limit. "We will take a piece of that money, we hope, to subsidize higher loan losses on less creditworthy borrowers," Rep. Frank told the National Association of Mortgage Brokers Legislative Conference. (The Bush administration wants the Federal Housing Administration to charge risk-based premiums under its reform proposal.) The chairman also told the brokers that he wants to make it easier for them to originate FHA loans. But in a separate predatory lending bill, he said he will look at yield-spread premiums to make sure consumers know what they are being charged.

Securitizers of subprime mortgages will likely face some assignee liabilities under a predatory lending bill that House Financial Services Committee Chairman Barney Frank, D-Mass., plans to introduce in May."I do believe there has to be some assignee liability," Rep. Frank told the National Association of Mortgage Brokers Legislative Conference. He said he believes some level of liability is needed to prevent the origination and securitization of bad loans. "It is the best enforcement mechanism we could have," he said. It will also give regulators leverage to get securitizers to exercise forbearance when there are problems in the subprime market. Chairman Frank also said he will steer away from a suitability standard, which is favored by many consumer advocates, and focus on the ability of the borrower to repay the loan.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., has invited the chief executives of five major lending companies, including New Century Mortgage Co., to testify at a March 22 hearing on the causes of the "subprime crisis."The CEOs of HSBC Mortgage Corp. USA, Countrywide Home Loans, WMC Mortgage Corp., and First Franklin Mortgage are also invited to explain their subprime lending practices to the committee. Sen. Dodd blames predatory and irresponsible lending practices for rising defaults and foreclosures on subprime loans. "At the very least, homeowners facing foreclosure deserve to know what factors contributed to their dire straits, and what steps are needed to fix this pressing problem," Sen. Dodd said.

Single-family housing starts rose 10% in February from the level of the previous month but with significant weakness in the Northeast and the Midwest, according to government figures released Tuesday.Multifamily starts (five units or more) fell 2.2% to 266,000 units. The Census Bureau and the Department of Housing and Urban Development found that single-family housing starts (one to four units) rose 10.3% to 1.22 million units -- but fell 32.7% compared with those of February 2006. Compared with the levels recorded in January, one- to four-unit starts fell 26% and 19.3% in the Northeast and Midwest, respectively, but rose in the South (up 16.4%) and the West (up 37.4%). On a year-over-year basis, the Midwest suffered the most, with starts plummeting 52.3%. According to RBS Greenwich Capital, "Builders reacted rapidly to the slowdown in housing demand that began last year by cutting back sharply on housing starts."

Two subordinated certificates from Merrill Lynch Mortgage Investors Trust series 2004-SL1 and 2004-SL2 have been placed on review for possible downgrade by Moody's Investors Service.The affected securities are class B-3 of series 2004-SL1 and class B-4 of series 2004-SL2. In addition, Moody's placed four classes on review for possible upgrade. The rating agency said the transactions are backed by subprime second-lien mortgages whose recent losses have exceeded the available excess spread, thereby depleting the overcollateralization.

Six certificates from three GSAMP Trust deals issued in 2006 have been downgraded by Moody's Investors Service.The downgrades were as follows: series 2006-S1, class B-2, from Ba2 to Caa2; series 2006-S2, class B-2, from Ba2 to Caa2; series 2006-S5, class M-6, from Baa2 to Ba3, class M-7, from Baa3 to B2, class B-1, from Ba1 to Ca, and class B-2, from Ba2 to C. In addition, the following five classes were placed on review for possible downgrade: series 2006-S1, class B-1; series 2006-S2, classes M-7 and B-1; and series 2006-S5, classes M-4 and M-5. The negative ratings actions were taken because credit enhancement levels are low given the projected losses on the underlying pools, Moody's said. "The pools of mortgages have seen a spike in losses in recent months, with high loss severity," the rating agency said. The transactions consist of subprime, second-lien, fixed-rate loans. The primary originators for the three transactions were Fremont Investment & Loans, Long Beach Mortgage Co., and New Century Mortgage Co. Moody's can be found online at http://www.moodys.com.

Twenty-seven classes from 15 Morgan Stanley subprime mortgage-backed securities have been downgraded by Fitch Ratings.Fitch also upgraded two classes and affirmed the ratings on 622 classes from 88 Morgan Stanley transactions. The negative rating actions were attributed to deterioration in the relationship between credit enhancement and expected losses. All the affected securities have serious delinquencies (ranging from loans delinquent more than 60 days to real estate owned) ranging from 20% to nearly 50%, the rating agency said.

Subprime-related mortgage exposure for U.S. asset-backed commercial paper programs fell sharply in the fourth quarter, though it remained high by historical standards, according to Fitch Ratings.The rating agency said ABCP programs had experienced a "significant spike" in subprime exposure a year earlier. Fitch attributed the recent decrease in subprime exposure to slowing originations, the resulting paydown out of warehouse facilities, and the closing of several subprime single-seller facilities in 2006. "While subprime exposure remains high on an historical basis, Fitch believes the levels are manageable, and investors remain well insulated from the pressures facing other market participants," Fitch said. The rating agency can be found on the Web at http://www.fitchratings.com.

Developers Diversified Realty Corp., a real estate investment trust based in Beachwood, Ohio, will replace Caremark Rx Inc. in the S&P 500 Index after the close of trading on March 20, Standard & Poor's has announced.S&P said the reason for the change is that Caremark is being acquired by CVS Corp. DDR will be replaced in the S&P MidCap 400 by Wellcare Health Plans Inc. S&P can be found online at http://www.standardandpoors.com.

A study by First American CoreLogic predicts that 1.1 million of the 8.37 million adjustable-rate mortgage loans originated between 2004 and 2006 will end up in foreclosure over a six- to seven-year period.That would be a cumulative 13% foreclosure rate on the $2.2 trillion portfolio. First American CoreLogic predicts that the defaulted loans will account for $326 billion of debt, and that even after the foreclosure and sale of the property, lenders and investors will lose $112 billion. Christopher Cagan, director of research and analytics at First American CoreLogic, said the impact of reset-based foreclosures will be greatest among subprime home loans and loans with low initial "teaser rates."

Wall Street wants to get its arms around rising subprime loan defaults as fast as possible so it can move forward with the least disruption to the markets, according to a loss mitigation firm hired to get a fix on polls of nonperforming mortgages.Jeffrey Taylor said clients that have hired his Orlando, Fla.-based firm, Digital Risk, "realize that they are a big part of the problem because they created the products" that have gotten many borrowers into financial difficulty. "They also realize that if they force lenders out of business [by requiring them to re-purchase delinquent loans], they have nothing," he added. "The message they want to convey to the investors who bought the bonds that are now being downgraded is that 'we know we erred, so here's the methodology we're going to use to project how new loans are going to perform during the next cycle'." Mr. Taylor would not reveal the name of Digital Risk's clients. But he said his firm has been hired to assess what went wrong with $30 billion worth of mortgage-backed securities. "Everything has happened so fast [our clients] don't have the infrastructure to wrap their hands around the problem," he said. "We're in a triage mode right now -- everybody is in a great panic."

The recently proposed federal subprime lending guidance reminds lenders that they should help consumers make informed choices and not steer them into 2/28 adjustable-rate mortgages when they might qualify for another product, according to Office of Thrift Supervision Director John Reich.It is an "inappropriate practice" to steer consumers into 2/28s with one-sided product descriptions that present the benefits without describing the risks, Mr. Reich told a National Community Reinvestment Coalition conference. (A 2/28 ARM is a 30-year mortgage that has a fixed rate for the first two years.) The comment period on the proposed guidance ends May 7. The thrift regulator also told the community activists that his agency is about to issue a final rule that realigns OTS's Community Reinvestment Act regulation with those of the other federal banking agencies. "We are making these revisions to our CRA rule to promote consistency and help facilitate objective evaluations of CRA performance across the banking and thrift industries," Mr. Reich said.

Credit-Based Asset Servicing and Securitization LLC will pay 28% less for Fieldstone Investment Corp., Columbia, Md., under an amended purchase agreement disclosed March 16.According to a statement released by the two firms, C-BASS will pay $4 a share for the struggling nonprime lender, compared with an original purchase price of $5.53. The price is being reduced to reflect "the cost to provide Fieldstone with needed additional liquidity," the two firms said. "This additional liquidity will be provided through the sale to C-BASS, at Fieldstone's option, of securities and mortgage loans owned by Fieldstone." Announced last month, the original cost of the deal was $260 million. C-BASS is a specialty servicer controlled by mortgage insurance giants MGIC and Radian. Fieldstone is a mortgage banking real estate investment trust. It lost $37.2 million through the first nine months of last year.

Accredited Home Lenders, San Diego, has been notified by the NASDAQ stock exchange that it will be delisted because it did not file its annual 10-K report by March 15.Accredited, the nation's 12th-largest subprime lender, is appealing NASDAQ's decision. In a statement, the company said the appeal will delay the delisting. In the meantime it is working to file its 10-K "as soon as possible." Accredited said it is continuing to "explore various strategic options, including raising additional capital to enhance liquidity." On March 16, the company said it has found a buyer for $2.7 billion in "loans held for sale" but will take a $150 million hit on the deal. In trading on Monday its shares were down 10%.

Struggling subprime funder NovaStar Financial trimmed its work force by 17% -- 350 positions -- on Friday, citing the changing landscape of the mortgage industry.The nation's 16th-largest subprime lender said the layoffs will affect its wholesale group "and related functions," including staffers at its headquarters in Kansas City, Mo., and at operation centers in California and Ohio. Its loan servicing platform is not affected by the job cuts, it said. According to the Quarterly Data Report, NovaStar is the nation's 21st-largest subprime servicer, with $16.5 billion in receivables. Like many subprime lenders, NovaStar has tightened its underwriting guidelines and exception policies and raised coupon rates to improve margins. It estimates that the layoffs will cost it up to $3.1 million in related charges.

The BBB-plus long-term counterparty credit rating on H&R Block Inc. has been placed on CreditWatch with negative implications by Standard & Poor's Ratings Services.The decision reflects the impact of deteriorating market conditions in the subprime mortgage industry on Block's subsidiary, Option One Mortgage Corp., S&P said. "We believe continued deterioration in the subprime market may affect Block's ability to dispose of its mortgage operations or extend existing warehouse funding agreements (current waivers expire April 27)," said S&P credit analyst Rian M. Pressman. "In addition, a decline in the value of its managed subprime mortgage portfolio could necessitate writedowns of residual assets, further reducing capital." S&P can be found online at http://www.standardandpoors.com.