Servicing

Freddie Mac has reported a net loss of $3.1 billion for 2007 ($5.37 per share), compared with net income of $2.3 billion ($3.00 per share) in 2006. In the fourth quarter, Freddie Mac lost $2.5 billion ($3.97 per share), compared with a net loss of $401 million ($0.73 per share) a year earlier. During the quarter, Freddie Mac took mark-to-market losses of $2.3 billion on its derivatives portfolio and $800 million on the value of its credit guarantee asset. Credit losses totaled $499 million for the full year, including $236 million reported in the fourth quarter and $126 million in the third quarter. As a result of the problems in the U.S. housing market, Freddie has increased its total credit loss estimates to $2.2 billion for this year and $2.9 billion for 2009. Freddie Mac said it had estimated regulatory core capital of $37.9 billion as of Dec. 31, 2007, which was $11.4 billion in excess of its regulatory minimum capital requirement and $3.5 million in excess of the 30% mandatory target capital surplus mandated by the Office of Federal Housing Enterprise Oversight.

Moody's Investors Service issued a flurry of news releases Feb. 26 involving downgrades and placements on review for possible downgrade of more than 100 classes of securities in transactions from eight issuers that are backed by second-lien loans. Among the affected securities were the following: Merrill Lynch Mortgage Investors Trust, 22 downgrades and one review placement; CSFB Home Equity Mortgage Trust, 19 downgrades and three review placements; SACO I Trust, 13 downgrades and two review placements; and Nomura Alternative Loan Trust, 10 downgrades and three review placements. "Substantial pool losses over the last few months have continued to erode credit enhancement available to the mezzanine and senior certificates," the rating agency said. "Despite the large amount of write-offs due to losses, delinquency pipelines have remained high as borrowers continue to default."

The SQ2-plus servicer quality rating of National City Bank as a primary servicer of second-lien loans has been placed on review for possible downgrade by Moody's Investors Service. The rating agency said the action was prompted by the "high level of volatility" in the mortgage market and a recent Moody's action placing the long-term ratings of the bank's parent company, National City Corp., under review for possible downgrade. Moody's said National City has largely maintained its servicing performance, but that the deterioration in the mortgage market and the slowdown in origination volume have the potential to "moderately" affect the investment and resource levels in the company's servicing platform. Servicing is performed by National City Lending Services, a division of National City Bank. The rating agency can be found on the Web at http://www.moodys.com.

An estimated 40% of outstanding subprime mortgage loans could go into default over the next three years based on current economic assumptions, according to Michael Bykhovsky, president of Applied Analytics, San Francisco. With an estimated loss severity in the range of 50%, that could lead to $200 billion in additional losses related to defaults on subprime home loans. During a press briefing sponsored by Fidelity National Information Services (the parent of Applied Analytics) at the Mortgage Bankers Association's National Mortgage Servicing Conference, Mr. Bykhovsky said there are an estimated $1 trillion of subprime home loans outstanding. He said he is skeptical of the prospects for term modifications that are being proposed as part of an effort to support subprime borrowers. "It will help, but not hugely," Mr. Bykhovsky said. "A lot of subprime loans will default anyway." Based on assumptions that include two more years of housing price declines, Applied Analytics projects that default rates may not start to trend downward until 2011. That dire outlook reflects the impact of declining home values on outstanding subprime mortgage loans, Mr. Bykhovsky said.

The Office of Federal Housing Enterprise Oversight is lifting the portfolio caps on Fannie Mae and Freddie Mac, which will allow the two government-sponsored enterprises to provide more liquidity to the mortgage market and invest in jumbo mortgages. "OFHEO will remove the portfolio growth caps for both companies on March 1, 2008," OFHEO Director James Lockhart said. The unexpected action gives the GSEs more room to use their new authority to purchase jumbo mortgages and hold them in portfolio until they can securitize the higher-balance mortgages. Mr. Lockhart noted that Fannie and Freddie are filing their 2007 annual financial reports on time, which shows they have made "substantial progress" in fixing their accounting systems and internal controls as specified in separate consent orders. The consent orders also require the GSEs to maintain a 30% capital surplus. The OFHEO director signaled that he will begin discussions with Fannie and Freddie to gradually lower the capital surplus.

Forty tranches from 14 transactions issued in 2004 and 2005 by Bear Stearns Asset Backed Securities I Trust have been placed on review for possible downgrade by Moody's Investors Service. The negative rating actions were based on a comparison of credit enhancement levels with projected losses, Moody's said.

Fifty-eight tranches from seven transactions issued under the RAMP 2005-RS shelf have been placed on review for possible downgrade by Moody's Investors Service. The negative rating actions were based on reductions in projected available credit enhancement from a significant build-up of delinquent loans, Moody's said. The collateral consists primarily of first-lien mortgage loans acquired by Residential Funding Corp. under the Negotiated Conduit Asset Program. The NCA Program was established to buy loans that do not comply with some of the criteria of RFC's standard programs.

Seventy-eight tranches from 20 chiefly subprime mortgage-backed securities deals issued by Terwin Mortgage Trust from 2003 through 2005 have been downgraded by Moody's Investors Service. Moody's also placed 10 additional tranches on review for possible downgrade. The downgrades were attributed mainly to weak performance in the underlying collateral pool, though many of the deals "have only experienced deterioration in performance at the tail end of the collateral pool, with pool factors near or below 10%," the rating agency said. "Additionally, the vast majority of these tranches have experienced diminished credit support as a result of passing performance triggers in prior periods." The collateral consists primarily of first- or second-lien subprime residential mortgage loans. Moody's can be found online at http://www.moodys.com.

More than 100 additional classes of first-lien subprime mortgage pass-through certificates were downgraded by Fitch Ratings on Feb. 25 as a result of changes to its subprime loss forecasting assumptions. Fitch also affirmed the ratings on classes with outstanding balances of $1.6 billion. The securities affected by the latest downgrades were 128 classes from 10 Ameriquest deals. The rating actions were attributed to changes to Fitch's subprime loss forecasting assumptions that "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness." Fitch can be found on the Web at http://www.fitchratings.com.

Standard & Poor's Ratings Services has announced the release of new versions of its CDO Evaluator Desktop models to reflect recently revised analytic assumptions. S&P released two versions of the model: CDO Evaluator 4.0, which replaces CDO Evaluator 3.3 and 3.1; and CDO Evaluator 2.6, which replaces the 2.4.3 model. CDO Evaluator 4.0 incorporates asset re-classifications, correlation revisions for certain residential mortgage-backed securities and RMBS-related securities, a Chinese interface, and several other enhancements, the rating agency said. S&P said it is also in the process of updating its CDO Evaluator Engine, CDS Accelerator, and CDS Xpress tools. The rating agency can be found on the Web at http://www.standardandpoors.com.