Servicing

Standard & Poor's Ratings Services has revised the CreditWatch status of most of its ratings on the AIG group of companies from negative to developing in the wake of the federal rescue of the insurance company. The affected ratings include its A-minus long-term counterparty credit ratings on American International Group and International Lease Finance Corp. and its A-plus counterparty credit and financial strength ratings on most of AIG's insurance operating subsidiaries. S&P also said it has raised the short-term counterparty ratings on AIG, its guaranteed subsidiaries, and ILFC from A-2 to A-1 and downgraded various subsidiaries' preferred shares from BBB to B. S&P credit analyst Rodney A. Clark said the actions of the Federal Reserve Bank of New York, which extended an $85 billion borrowing facility to AIG, will provide the company with "substantial relief from its near-term liquidity constraints." S&P can be found online at http://www.standardandpoors.com.

Fitch Ratings has revised its Rating Watch on American International Group Inc. and its subsidiaries from Negative to Evolving following the federal rescue of the ailing insurance giant. Fitch said it views the move as favorable overall because it "alleviates significant near-term liquidity concerns and provides a source of funding for potential future collateral requirements that are primarily derived from AIG's AIG Financial Products Corp. subsidiary." Fitch said it also believes the arrangement "provides a platform of stability for AIG's primary operating subsidiaries and significantly curtails substantive pressure on AIG to sell assets quickly to fund potential cash calls." The downside is the "effective subordination of essentially all" AIG's senior debt and hybrid instruments, Fitch said. The rating agency said AIG's "most pressing challenges" are likely to evolve from meeting immediate liquidity needs to managing higher financial leverage.

R&G Financial Corp., San Juan, Puerto Rico, has announced an agreement to settle litigation with Freddie Mac under which its subsidiaries R&G Mortgage Corp. and R-G Premier Bank of Puerto Rico will remain approved Freddie seller/servicers. The settlement, subject to approval by the U.S. District Court for the District of Puerto Rico, may be rescinded by Freddie Mac if a sale of mortgage servicing rights is not consummated within a certain period. Under the sale agreement, Banco Popular of Puerto Rico, a subsidiary of Popular Inc., San Juan, would purchase approximately $5.1 billion of third-party mortgage servicing rights from R-G Mortgage Corp. The companies can be found on the Web at http://www.rgonline.com and http://www.popularinc.com.

Rumors continued to fly Thursday morning about the possibility that Washington Mutual and Morgan Stanley could soon be sold, raising questions about the future of the mortgage finance landscape. Washington Mutual filed a notice Wednesday with the Securities and Exchange Commission indicating that TPG Capital, leader of an investment consortium that owns about half of WaMu's shares, gave up protection from equity dilution in the event of a sale or other capital-raising event. JP Morgan Chase, Wells Fargo, HSBC, and Citigroup have been mentioned as possible suitors for WaMu. Meanwhile, Morgan Stanley is reportedly in "advanced talks" to sell itself to Wachovia Bancorp and has also approached a Chinese sovereign wealth fund about making an additional investment in the firm, according to Reuters. However, some analysts are questioning the logic of a Morgan Stanley-Wachovia pairing, noting that Wachovia is already struggling to manage credit losses on a $122 billion option-ARM portfolio largely inherited from its 2006 acquisition of Golden West.

Rating agency DBRS has placed all of Washington Mutual's ratings under review with negative implications after Standard & Poor's downgraded WaMu's unsecured debt to "junk" levels. Responding to the S&P downgrade, WaMu noted that S&P's ratings for Washington Mutual Bank remain at investment-grade level. WaMu also noted that none of its unsecured debt is subject to ratings-based financial covenants that would accelerate payments or trigger early maturity or default. The company said it does not expect the rating downgrade to have a material impact on borrowings, collateral, or margin requirements. Moody's Investors Service had downgraded WaMu last week. Trading in WaMu's stock was mixed on Tuesday, with the company's share price closing at $2.32, up 32 cents on the day.

Freddie Mac is reminding its servicers that they have the discretion to provide up to a year's worth of mortgage relief to borrowers affected by Hurricane Ike. Freddie Mac gives mortgage servicers the discretion to reduce or suspend mortgage payments for up to 12 months for borrowers with Freddie Mac-owned mortgages in federally declared major-disaster areas. Servicers can offer relief to borrowers who cannot make mortgage payments because they were evacuated to avoid the storm as well as those whose homes were damaged. Servicers should assess each case individually to determine whether relief is warranted, the government-sponsored enterprise said. Freddie can be found online at http://www.freddiemac.com.

Morgan Stanley took net writedowns of $640 million in its mortgage proprietary trading business in the fiscal third quarter, but it was able to realize relatively strong overall net income of about $1.4 billion. The firm's net income was down from approximately $1.5 billion a year earlier, but market participants and observers considered it relatively strong compared with larger mortgage writedowns and poorer results at other Wall Street firms. "Despite unprecedented market conditions, Morgan Stanley's core client franchise achieved solid revenue growth, profitability, and [return on investment] this quarter," said John Mack, the company's chairman and chief executive officer.

Barclays PLC, London, has agreed to pay an estimated combined price of 1 billion pounds ($1.75 billion) for three of the bankrupt Lehman Brothers' New York-area facilities and for certain of Lehman's North American businesses -- including its partially mortgage-related fixed-income sales, trading, and research unit. Barclays said it plans to pay an estimated 800 million pounds ($1 billion) for Lehman's head office in New York as well as two data centers in New Jersey. It is also set to pay just 140 million pounds ($250 million) for Lehman's North American investment banking and capital markets businesses. The North American Lehman businesses that Barclays plans to buy have about 10,000 employees, trading assets with an estimated value of £40 billion ($72 billion), and trading liabilities with an estimated value of £38 billion ($68 billion), according to Barclays.

Impac Mortgage Holdings, a subprime lender based in Irvine, Calif., has reported a net loss of $31.3 million ($0.51 per share) in the first half, compared with a net loss of $274.2 million in the first half of 2007. Impac, a real estate investment trust, said the "broad repricing of mortgage credit risk continued the severe contraction in market liquidity" and that the volatile capital markets "have effectively been unavailable" to the company. The mortgage REIT said it hopes to "align the costs of our operations to the cash flows from our long-term mortgage portfolio (residual interests in securitizations), master servicing portfolio, and real estate advisory fees." The company said other goals include reducing or eliminating dividend payments on its preferred stock and modifying its trust preferred securities. Impac can be found online at http://www.impaccompanies.com.

The Department of Housing and Urban Development is very close to finalizing guidelines for the Hope for Homeowners program that will allow second lienholders on restructured loans to share in future appreciation of the property, according to a Federal Housing Administration official. "This would be the one method" that the board overseeing the Hope program "can use to entice those subordinated lienholders to participate in the program," FHA director for single-family program development Meg Burns told a Mortgage Bankers Association compliance conference. "So we are looking at that particular feature and planning to share that appreciation with the existing subordinated lienholders." The foreclosure prevention program is targeted at rescuing borrowers with underwater mortgages. All subordinate liens much be extinguished before the homeowner is refinanced into a new FHA-insured mortgage with a 90% loan-to-value ratio. In a successful restructuring, HUD and the homeowner would split any appreciation 50-50 if the property is sold after five years. The Hope board still has to decide how much should be shared with second lienholders. However, the 10% equity cushion that is created by the writedown (to a 90% LTV ratio) cannot be shared with a second lienholder, Ms. Burns said.