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Moody’s Investors Service on Wednesday proposed a set of new requirements for residential mortgage securitizations, as the agency looks to toughen up its stance in the wake of a historic collapse in the private-party RMBS market, and after investors have questioned whether conflicts of interest prevented the agencies from properly structuring billions of dollars worth of mortgage deals.

The agency proposed sweeping changes to both the due diligence and surveillance processes, in particular, as well as suggesting it would undertake a significantly more comprehensive assessment of originators.

Perhaps most surprisingly, Moody’s said it wants to see completely independent third parties engaged during both issuance and underwriting, and during a “standard post-securitization forensic review” that would look at loans that become severely delinquent during the first 18 months of a deal’s life. The pre-issuance due diligence standard suggested by the agency would set a minimum sampling size of 5 to ten percent for prime and subprime loans.

Moody’s proposal to engage third parties at key stages of the securitization process represents a stark departure from current industry practice, and hits into the area most frequently targeted by critics as representing a conflict of interest for rating agencies, who are paid by issuers to structure deals on behalf of investors.

The agency also proposed sweeping changes to representations and warranties, suggesting that issuers “more explicitly address fraud, misrepresentation, data quality, early payment defaults and adherence to underwriting guidelines.” Moody’s said it may even decline to rate altogether transactions lacking the additional disclosures, as well as any transaction backed by an issuer lacking the financial resources to absorb repurchases.

Beyond the loans themselves, Moody’s also said it will conduct a more comprehensive review of each originator and will report on its opinion of its strengths and weaknesses, as well as maintaining records of each originator’s track record in previous securitizations. The rating agency did not say it would go so far as to actually rate originators, however — something many industry participants have suggested is a needed reform.

Moody’s also said it would likely become the latest party to start asking for additional data from issuers and servicers. The agency wants significantly expanded data to enhance its surveillance efforts, it said — and that includes monthly performance data that ties loan-level data from servicers together with the data collected during deal issuance. We’re talking about detailed data on loan modifications, fees, claims — everything.

Moody’s said it will look to apply the new standards to prime as well as non-prime securitizations. Industry participants have through April 11 to comment on the proposed rules.

For more information, visit http://www.moodys.com.

U.S. Senators Chris Dodd (D-CT), chairman of the Senate Committee on Banking, Housing, and Urban Affairs, and Patty Murray (D-WA), chairman of the Senate Appropriations Subcommittee on Transportation, Housing and Urban Development, said last week that they had sent a letter to President Bush calling for the resignation of HUD Secretary Alphonso Jackson.

Both senators allege that Jackson refused to answer questions about the consideration of political affiliation in determining contract awards, claims that have dogged the HUD secretary ever since two years ago he suggested that he denied a contract because a bidder spoke ill of President Bush.

Via the New York Times, a recap of those fateful remarks:

“Why should I reward someone who doesn’t like the president, so they can use funds to try to campaign against the president?’” Mr. Jackson asked … After the ensuing controversy, he claimed his comments were merely “anecdotal,” and insisted he did not believe in such punishment.

Housing officials in Philly recently complained, as well, saying that Jackson “retaliated” by stripping the city of some of its federal funding when it refused to play ball with an associate of his. HUD is publicly denying the allegations.

Dodd and Murray’s renewed call for Jackson’s resignation represent the latest negative attention to focus on the HUD secretary, during a time when the U.S. housing crisis is front-and-center for the nation’s economy.

“Given findings in the Inspector General’s report that Secretary Jackson advised his senior staff to improperly take political affiliation into account in awarding contracts … I do not believe Secretary Jackson is capable of effectively carrying out his responsibilities,” said Dodd.

“Now, more than ever, we need a HUD Secretary who can devote his full energy to solving our nation’s housing crisis.”

Jackson has denied doing so.

At a recent subcommittee hearing on the HUD budget, Murray repeatedly asked Jackson for details on the troublesome Philadelphia deal allegedly gone wrong –- questions that Murray says Jackson refused to answer.

“My subcommittee funds every dollar that is spent at HUD. We have an obligation to the taxpayer to see to it that those dollars are administered without corruption and favoritism. But we can’t do our job if Secretary Jackson refuses to do his,” Murray said.

“This is a cabinet secretary who has consistently ducked accountability, and arrogantly refused to heed the public’s calls for answers. Secretary Jackson should resign immediately and seek to clear his name as a private citizen – if he can.”

Despite the strong words from Congressional Democrats, it’s not clear at this point if any Republicans on Capitol Hill are willing to join in the fray, or if they see the attention on Jackson as an instance of partisan bickering.

If you’ve ever taken out a mortgage before, you probably know all about getting a good faith estimate. Taking out mortgage is a complicated process and there are literally dozens of different fees you’ll have to pay for in order to get it. Processing, underwriting, property appraisal and document preparation are just a few of the fees you’ll probably see. A good faith estimate is simply an estimate made by your lender to get the approximate fees due at closing. The fees range from lender to lender but you can expect to pay somewhere around 3%-5% of the sale price. As you can see, the price can be pretty significant and you’ll want to shop around for different estimates. Before you go out to get your estimates, there are some things you should know about them.

What You Should Know About It

• First, keep in mind that the good faith estimate is exactly that. It’s an estimate the lender makes to the best of their ability, but the final costs may vary so don’t be surprised if you end up paying a slightly different amount.
• Some people have compared shopping for a mortgage to shopping for a new car. Many lenders include some unnecessary fees in there and you may be able to negotiate with them. If any fees seem much higher at certain lenders, ask your lender to explain them to you.
• Remember that some of the larger lenders that operate nationwide may not be able to provider a completely accurate estimate. They simply may not be familiar with all the taxes and customs in your area.
• Since mortgage payments are generally due on the first of the month, you may be able to reduce the prepaid interest you owe by closing near the end of the month.
• You’ll have to deal with some fees from your local and state government, such as transfer taxes and recording fees. These should be the same at every lender and are non-negotiable.

 

Related:

• Good Faith Estimate: More Fees at Closing
• Wikipedia: Good Faith Estimate

Beleaguered bond insurer Security Capital Assurance Ltd saw Fitch drop a core credit rating to junk status on Wednesday afternoon, a move that may further push the monoline’s future into doubt. Fitch cut SCA’s long-term issuer rating to ‘B-’ from ‘BBB,’ while also further downgrading the insurer financial strength ratings of SCA’s primary insurance subsidiaries to ‘BB’ from a prior rating of ‘A.’

Investors will likely be foreced to further mark down their RMBS and CDO holdings that include a guaranty issued by the monoline, as a result.

Security Capital’s two primary subsidiaries are XL Capital Assurance Inc., a monoline financial guarantee insurance provider, and XL Financial Assurance Ltd., a monoline provider of reinsurance to financial guarantee insurers. Fitch had originally cut its AAA-rating on XLCA in January.

Fitch cited “material erosion in SCA’s franchise value and competitive business position” as the core driver for the downgrades, and said that losses on SCA’s structured finance collateralized debt obligations (SF CDO) backed by subprime RMBS will ultimately fall within a range of about $3 to $4 billion.

The downgrade does not represent an immediate liquidity concern, the agency said, as SCA’s modeled claims paying resources and committed external reinsurance coverage amounted $4.2 billion as of the end of last year. Nonetheless, Fitch said that its estimate of losses relative to available capital was no longer consistent with an investment-grade rating, and said that SCA was $5.6 to $5.9 billion short of qualifying for a AAA rating. The insurer would need at least another $600 million in capital to qualify for Fitch’s lowest investment-grade rating.

SCA said in a seperate press statement that is was “disappointed” with Fitch’s rating action (what, you thought they’d be pleased?), and that the agency likely employed “significantly different assumptions” in their analysis of SCA’s CDO portfolio than the company did in performing its own risk analsyis. SCA also followed the lead of other major monoline insurers of late, and piled onto Fitch’s status as the third major rating agency, saying that it had only publicly rated three of SCA’s 25 insured CDO of ABS deals.

The company said its own analysis — which it characterized as “comprehensive” and “bottom up” — led it to establish case loss provisions totaling $838.6 million before reinsurance, and $651.5 million after reinsurance in the fourth quarter of last year.

The question is: who should investors now believe? On that front, it would appear the answer is Fitch: shares in SCA were trading down nearly 11 percent in morning activity on the NYSE, at $0.61/share.

For more information, visit http://www.fitchratings.com and http://www.scafg.com.

After a wild and woolly few weeks that have seen mortgage rates ride a fast-changing roller coaster that most aren’t accustomed to, long-term rates remained relatively calm during the past week as moves by the Fed and other government regulators helped restore some semblance of order to a secondary mortgage market that is still very much out-of-sorts.

According to data released Thursday morning by Bankrate.com, fixed-rate mortgages remain at a significantly lower rate relative to adjustable-rate mortgages — driving ARM share of application activity to near an all-time low. The Mortgage Bankers Association reported Wednesday that adjustable-rate applications represented just 3.8 percent of all applications during the past week.

Fixed mortgage rates inched lower over the past week, with the average conforming 30-year fixed mortgage rate now at 5.95 percent, with an average of 0.49 discount and origination points; the average jumbo 30-year fixed rate declined modestly to 7.37 percent, Bankrate.com said.

Adjustable mortgage rates were very mixed, however, with the average 1-year ARM rising to 6.25 percent while the average 5/1 ARM plunged to 6.16 percent.

It’s unusual, to say the least, to see fixed mortgage rates lower than the rates offered to borrowers taking adjustable rate mortgages — usually, the entire reason a borrower takes out an ARM is to arbitrage the current rate environment in their favor.

But adjustable rate mortgages have higher instances of delinquency than fixed rate loans, and investors are exacting a price for that by commanding higher returns. Translation: higher rates for ARM borrowers.

Despite the relative calm in the markets, experts that spoke with HW Thursday morning said the rate environment will likely continue to be very volatile throughout the foreseeable future.

“Don’t be fooled into thinking rates have settled down,” said one source, a bond trader who asked not to be named. “The dynamics driving volatility are still very much in place, even if the technicals aren’t moving right now.”

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