The misfortunes of Taylor, Bean & Whitaker Mortgage Corp. (TBW) and its warehouse lender Colonial Bank dragged Ocala Funding's asset-backed commercial paper (ABCP) program into the "vortex" of financial woes, according to commentary Monday by Moody's Investors Service.

Colonial bank served as bailee for Ocala collateral, but the Federal Deposit Insurance Corp. acting as Colonial's receiver after the bank failed has yet to release Ocala collateral, putting repayment of Ocala notes in jeopardy, Moody's said.

Ocala acts as an ABCP conduit that provides warehouse funding for residential mortgages originated by TBW. Bank of America (BAC: 7.29 -0.14%) serves as trustee and administrator of the transactions under the $1.75bn program. As custodian, BofA appointed as its bailee Colonial, which delivered almost 8,000 loans to Freddie Mac (FRE: 0.00 N/A). The GSE paid $1bn for most of the loans. Then Colonial and TBW began a period of "rapid deterioration" and were soon essentially shut down by regulators.

"BoA is now disputing $1bn of Ocala's cash and mortgages at Colonial with the FDIC," Moody's said. "It is unclear how and when this will be settled and when payment on the Ocala notes will be made."

TBW filed for relief under Chapter 11 bankruptcy following moves by the Federal Housing Administration and Ginnie Mae to prohibit TBW from originating new FHA-insured mortgages or Ginnie securities. While TBW primarily originated loans for Ginnie securities, which are backed by the full faith and credit of the US government, Moody's rates six deals backed by TBW's Alt-A loans.

Moody's said it placed 50 bonds on review for possible downgrade. Some of these bonds bear high credit support — as much as 80% in some cases — although Moody's noted non-payment of interest and principal drives uncertainty of future recoveries.

The bonds backed by these transactions received no interest or principal payments during the August payment cycle, since regulators froze TBW's collection accounts. Wells Fargo Bank, acting as Master Servicer, received no remittance from these accounts on the expected date of August 18. Wells is working with TBW and regulators to lift the freeze from the collection accounts and distribute collections to investors, although Moody's said it remains uncertain whether the freeze will lift.

"At the same time, Wells Fargo is also working to organize a transfer of servicing in order to safeguard future cash flows," Moody's noted. "Wells Fargo Bank terminated TBW as servicer following an event of default unrelated to TBW’s solvency on August 12. Since TBW later filed for bankruptcy, the termination has been stayed by the bankruptcy court."

Moody's added: "The bank is petitioning the court to lift the stay and, if successful, intends to initially transfer the servicing to American Home Mortgage Servicing, Inc., which has experience in servicing similar collateral."

Write to Diana Golobay.

The Muslim Community Cooperative – Australia (MCCA) launched an real estate investment fund this week that complies with Islamic law geared toward such investors in the country.

The company said it believes it is the first such retail managed investment mortgage fund following Shariah principles, including strict guidelines on industries or services where funds can be invested.

The principles prohibit usury or interest-based investment products. Shariah principles also dictate investors must have a stake in the collateral of a debt, and that is generally accomplished by selling a portion of ownership in the collateral to the investors.

The MCCA Income Fund will be issued in September and investors can get into the fund with as little as $500. While geared toward Muslim investors, it is open to “any Australian investors seeking ethical investments that comply with Shariah principles,” MCCA said in a statement.

The fund is registered with the Australian Securities and Investments Commission (ASIC) and a product disclosure statement will be issued in September.

The news comes as another Islamic bank, Kuwait Finance House, announced it's getting back into the US residential mortgage secondary market.

Write to Austin Kilgore.

Discussion among market players and even Federal Reserve officials on when the Fed may begin to exit asset-purchasing programs are "very premature," according to the Federal Reserve Bank of New York president and CEO William Dudley.

In a speech Saturday before the Association for a Better New York, Dudley said agency debt- and mortgage-backed-securities-purchase programs as well as the Treasury-purchase program contributed overall to the Fed's expanded balance sheet. But the swelling balance sheet does not pose inevitable threats of inflation and do not necessitate talks of immediately winding-down the Fed's agency MBS-purchase program.

Dudley said in the case of lackluster recovery, unemployment and capacity remain too high to foster inflation, regardless of the Fed's balance sheet.

"[C]oncern about 'when' the Fed will exit from its current accommodative monetary policy stance is, in my view, very premature," he said.

He did, however, acknowledge the importance of looking at just how the Fed can exit its numerous monetary policies. The size of purchase programs looks likely to push the Fed's balance sheet to roughly $2.5trn, above the peak reached last December, Dudley said.

His comments that talks regarding when the Fed may exit are premature came days after two prominent Fed officials spoke about possible exits.

In a speech late last week, St. Louis Federal Reserve president James Bullard indicated the Fed would in 2010 begin the shift into implementing an exit strategy by eliminating the liquidity programs as they expire, exiting the current interest rate policy and ceasing the asset-purchase program. He said recent housing data indicates the market is near bottom.

"While exiting liquidity programs seems quite clear, exiting the asset purchase program may have to rely on selling assets as appropriate," he said.

The same day Bullard gave his speech, the Richmond Federal Reserve president Jeffrey Lacker said purchasing agency MBS to the extent of the $1.25trn allowed under the program may provide more stimulus than needed or even helpful.

“With the economy leveling out and beginning to grow again later this year, and with bank reserve demand ebbing as financial conditions improve, I will be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide,” Lacker said.

Write to Diana Golobay.

Moody's Investors Service placed 64 classes from four commercial mortgage-backed securities (CMBS) transactions on review for possible downgrade on exposure to loans sponsored by Babcock & Brown Ltd. (BBL).

The reviews affect approximately $3bn of Credit Suisse Commercial Mortgage Trust (CSCMT) structured securities.

Four of the five BBL-sponsored portfolios reside in special servicing on 30-day delinquencies, indicating likely losses that will affect the CMBS deals. All of the loans are backed by geographically diverse multifamily properties — usually older Class-B and -C properties — and are encumbered by mezzanine debt, Moody's said.

Credit uncertainty within BBL triggered the reviews, as loans representing "a material share" of outstanding balances within the deals are facing review on possible or anticipated losses. Last week, BBL's creditors voted to liquidate the company, Moody's said.

"According to information provided on BBL's web site, this is not expected to have any material impact on the main operating and asset owning entity, Babcock & Brown International Pty Ltd," Moody's said. "BIBIPL will continue to operate and will proceed with the orderly realization of assets over an approximate two to three year time horizon to reduce debt."

Moody's will study the progress of the BBL liquidation and potential losses on specially serviced loans, as well as the performance of the overall pool, when reviewing the affected classes.

Write to Diana Golobay.