Servicing

Default rates on subprime mortgages will reach 22.17% by October, a 12-month increase of 14%, according to a new forecast made by Friedman Billings Ramsey. FBR sees alternative-A defaults rising to 6.67% in October, compared with 5.36% a year earlier. FBR says the higher default rate projections were spurred by a deteriorating labor market. On Friday, FBR threw its subprime unit, First NLC Financial Services, into bankruptcy. (See item above.) The lender is expected to be liquidated.

The ratings of Countrywide Financial Corp. have been placed on Rating Watch Positive by Fitch Ratings following the announcement of Countrywide's proposed acquisition by Bank of America Corp., while BoA's ratings have been affirmed and left with a negative rating outlook. Fitch said the transaction poses "significant challenges" to BoA, while enabling it to "achieve a key strategic goal" in the longer term. "The most significant challenge will be resolving credit issues related to CFC's stressed mortgage lending operations," the rating agency said. "While CFC has ceased nonprime lending activities, it retains a large volume of subprime, alt-A and high-value loan-to-value home equity loans on its books." Fitch can be found online at http://www.fitchratings.com.

Countrywide Financial Corp. chairman, chief executive, and founder Angelo Mozilo is entitled to a severance package of about $112 million if he leaves the company, according to a report put out by Equilar, an executive compensation company. Last week Bank of America agreed to buy the nation's largest lender and servicer for $4 billion. To date, no mention has been made about Mr. Mozilo's role with a Countrywide-owned BoA. His Countrywide employment contract stipulates that his reign as CEO will end in 2009, but he would remain as a nonexecutive chairman. If BoA decides not to keep him on as CEO, or he chooses to retire, his severance package would kick in. Basing its information on a year-old proxy statement, Equilar says Mr. Mozilo is entitled to a severance package of $88 million plus retirement benefits of $24 million. At deadline time, Countrywide could not be reached for comment. Over the past few yeas Mr. Mozilo has sold well over $300 million worth of Countrywide stock, converting options into cash. His stock sales are the subject of an investigation by the Securities and Exchange Commission. In past interviews he has maintained that all his stock sales were disclosed and done according to SEC rules.

The city of Cleveland has sued 21 lenders and Wall Street firms involved in the subprime mortgage market, seeking monetary damages under a "public nuisance law." The litigation is the latest in a series of municipal actions targeting lenders. The Cleveland lawsuit alleges that the lenders "financed and cultivated" the subprime market, leading to a foreclosure crisis that has proved costly for the city. Bank of America, Citigroup, Deutsche Bank, J.P. Morgan Chase, Merrill Lynch, Bear Stearns, Ameriquest, Washington Mutual, Countrywide Financial Corp., Morgan Stanley, Wells Fargo, Fremont General Corp., GMAC-RFC, Goldman Sachs, Greenwich Capital Markets, HSBC Holdings, IndyMac Bancorp, Lehman Brothers, NovaStar Financial, and Option One Mortgage were all named as defendants in the lawsuit.

Merrill Lynch & Co. may take additional writedowns of up to $15 billion on its collateralized debt obligations and subprime investments when it announces earnings this week, according to various analyst reports. Merrill, which is slated to announce earnings Jan. 17, would not comment on the reports. (In the third quarter, it took a $7.9 billion hit on CDOs and subprime assets.) According to a note put out by Sandler O'Neill, many "wild cards" exist for Merrill. "Estimating CDO/subprime writedowns is quite subjective given the range of marks we have seen from peers," said Sandler. "Our current estimate of $10 billion represents an estimated markdown to $0.40 on the dollar from [Merrill's] starting exposure levels. While this markdown is arguably quite aggressive, certain peers have been even more aggressive in putting these issues behind them. For example, we estimate that Morgan Stanley marked its exposure in the range of $0.25 on the dollar." Sandler said if Merrill takes a $15 billion charge in the fourth quarter, "this would represent a net writedown to approximately $0.22 on the dollar."

Merrill Lynch & Co. may take additional writedowns of up to $15 billion on its collateralized debt obligations and subprime investments when it announces earnings next week, according to various analyst reports. Merrill, which is slated to announce earnings Jan. 17, would not comment on the reports. (In the third quarter, it took a $7.9 billion hit on CDOs and subprime assets.) According to a note put out by Sandler O'Neill, many "wild cards" exist for Merrill. "Estimating CDO/subprime writedowns is quite subjective given the range of marks we have seen from peers," said Sandler. "Our current estimate of $10 billion represents an estimated markdown to $0.40 on the dollar from [Merrill's] starting exposure levels. While this markdown is arguably quite aggressive, certain peers have been even more aggressive in putting these issues behind them. For example, we estimate that Morgan Stanley marked its exposure in the range of $0.25 on the dollar." Sandler said if Merrill takes a $15 billion charge in the fourth quarter, "this would represent a net writedown to approximately $0.22 on the dollar."

Six classes of certificates from American Home Mortgage Investment Trust 2007-2 (backed by closed-end second-lien mortgage loans) have been downgraded by Moody's Investors Service. The downgrades were as follows: class II-A, from Aaa to Baa1 (and placed under review for possible further downgrade); class II-M-1, from Aa2 to Ba1 (and placed under review for possible further downgrade); class II-M-2, from A2 to Caa2; class II-M-3, from Baa2 to Ca; class II-M-4, from Baa3 to C; and class II-M-5, from Ba2 to C. "The actions reflect the extremely poor performance of the closed-end second-lien mortgage loans," Moody's said. "These loans have seen a high rate of early default, and the deal has built up a significant pipeline."

Twenty tranches from four mortgage-backed securities deals issued by BCAP in 2007 have been downgraded by Moody's Investors Service, and six tranches have been placed under review for possible downgrade. The negative rating actions were attributed to higher-than-expected rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels. The collateral consists primarily of first-lien, fixed- and adjustable-rate alternative-A mortgage loans. Moody's can be found online at http://www.moodys.com.

The long- and short-term issuer default ratings of PHH Corp., Mt. Laurel, N.J., have been affirmed by Fitch Ratings, but a negative rating outlook has been assigned. The company's long-term IDR stands at BBB-plus, and the short-term IDR is F2. The negative outlook was assigned (and the ratings were removed from Rating Watch Evolving) after PHH's announcement that it had terminated a merger agreement with General Electric Capital Corp. "Recent weakness in the company's mortgage unit has been offset by PHH's fleet leasing business, which has performed well," Fitch said. "Fitch believes, however, that the mortgage industry remains challenging and highly uncertain." Fitch can be found online at http://www.fitchratings.com, and PHH can be found at http://www.phh.com.

UnionBanCal Corp., San Francisco, has announced that it expects to make a $60 million provision for credit losses for the fourth quarter, a $45 million increase from its October forecast stemming chiefly from loans to homebuilders. The company held approximately $850 million in homebuilder loans as of Dec. 31, about 2% of its loan portfolio, said Philip Flynn, vice chairman and chief operating officer of UnionBanCal. "We believe that our homebuilder exposure is less than peer banks, on average, and that our homebuilder customers collectively are financially stronger than average," Mr. Flynn said. "Still, given the poor fundamental conditions in the homebuilding industry today, and the weak outlook for the industry, we concluded that it was appropriate to increase reserves for probable future loan losses."