Servicing

In a new research report, Credit Suisse calls into question the "credibility" of Washington Mutual's management, citing what it calls "numerous upward revisions" to the thrift's credit expectations on future writedowns."We are concerned by the deterioration of WaMu's credit metrics and we do not believe WaMu is out of the woods," writes analyst Moshe Orenbuch. (The nation's largest thrift recently raised $3 billion in convertible preferred stock, offering a coupon of 7.75% on the notes.) Credit Suisse predicts that WaMu faces credit losses of nearly $5 billion in 2008, with an additional $3.55 billion of reserve additions. "We believe that [nonperforming assets] should increase to roughly $10 billion or 3% of total assets," Mr. Orenbuch says. Credit Suisse has a "neutral" rating on the stock. In trading Tuesday, WaMu's share price fell to a new 52-week low of $14.11. Its high is $46.

President Bush says it is "going to take a while to work through this housing bubble," but that his administration does have a strategy for helping subprime borrowers refinance or restructure their mortgages.The president said in a speech on the economy that the Treasury Department has worked with mortgage servicers so borrowers don't "get pinched as their interest rates reset." He also noted that the Federal Housing Administration is helping to refinance subprime borrowers and could do more if Congress passes an FHA modernization bill. (The Senate just passed such a bill, which now has to be reconciled with the House version.) Former Federal Reserve Board Chairman Alan Greenspan has suggested that the federal government could provide cash assistance for distressed homeowners who can’t afford their mortgage payments. Mr. Bush stressed in his Fredericksburg, Va., speech that he is against bailouts for lenders, speculators, and people who bought a house they couldn't afford. "But we can mitigate some of the issues, and I'm concerned about people who are creditworthy enough to live in their homes not being able to deal with these resets," he said.

The Federal Reserve Board is proposing a "robust set" of rules to clean up subprime lending practices and to address unfair and deceptive practices associated with servicing, mortgage broker fees, and appraisals.On subprime and higher-priced alternative-A mortgages, the Home Ownership and Equity Protection Act proposal would create an ability-to-repay standard, require lenders to verify income and assets to curb stated-income lending, mandate escrow accounts for at least 12 months, and require prepayment penalties to expire 60 days before the first monthly increase in payments. Under pressure from Congress, the Fed was expected to address those subprime practices. However, the Fed decided that it needed to go further to provide a robust and "more comprehensive set of protections" that apply to all mortgages, said Randall Kroszner, a Fed governor. The proposal requires brokers to disclose up front the dollar amount of their fees, including yield-spread premiums, in a written agreement with the borrower. "Creditor payments to a mortgage broker could not exceed the total compensation amount stated in the written agreement," according to the proposal, which is being issued for a 90-day comment period. Servicers could be sued under the Truth in Lending Act for failing to post mortgage payments properly and pyramiding late fees. Lenders and brokers also would be liable for coercing appraisers. "We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated," Fed Chairman Ben Bernanke said.

Three classes of J.P. Morgan Alternative Loan Trust securitizations have been downgraded by Fitch Ratings.The downgrades were as follows: J.P Morgan Alternative Loan Trust 2006-A1 pools 2-5, class C-B-1, from AA to AA-minus; class C-B-2, from A to BBB-plus; and class C-B-3, from BBB to CBB-minus. Fitch also placed four classes from two other J.P. Morgan Alternative Loan Trust deals on Rating Watch Negative and affirmed the ratings on 11 other classes. The negative rating actions were attributed to deterioration in the relationship between credit enhancement and expected losses. The collateral for the deals consists primarily of first-lien alt-A mortgage loans.

Four classes of Washington Mutual alternative-A residential mortgage pass-through certificates, WMALT series 2006-3, have been downgraded by Fitch Ratings.The downgrades were as follows: class B-2, from A to BBB and placed on Rating Watch Negative; class B-3, from BBB to BB and placed on Rating Watch Negative; class B-4, from BB to C/DR4; and class B-5, from B to C/DR5 and removed from Rating Watch Negative. The negative rating actions were based on deterioration in the relationship between credit enhancement and expected losses, Fitch said. The collateral for the deals consists primarily of 15- and 30-year, fixed-rate, first-lien mortgages extended to alternative-A borrowers.

Six tranches from several deals issued by Structured Adjustable Rate Mortgage Loan Trust in 2004 and 2005 have been downgraded by Moody's Investors Service.The downgrades were as follows: series 2004-11, class B3, from Baa2 to Ba3, and class B4, from Ba2 to Ca; series 2005-6XS, class M2, from A2 to Baa3, and class M3, from Baa2 to Caa3; and series 2005-8XS, class M3, from Baa1 to Ba3, and class M4, from Baa2 to Caa1. Moody's also upgraded four tranches and confirmed the ratings on six tranches from the SARM transactions. The downgrades were based on the low credit enhancement levels of the tranches relative to projected losses on the underlying pools, the rating agency said. Class B5 of series 2004-11 is realizing losses, and class B4 is likely to experience writedowns as the deal realizes further losses, Moody's said. Overcollateralization amounts in both 2005 transactions are below their targets, and pipeline losses could put pressure on the subordinate tranches. The transactions consist primarily of first-lien alternative-A mortgage loans originated mostly by Aurora Loan Services Inc.

Seven tranches from Newcastle Mortgage Securities Trust 2007-1 have been downgraded by Moody's Investors Service.The downgrades were as follows: class M-5, from A2 to A3; class M-6, from A3 to Baa2; class M-7-A, from Baa1 to Ba1; class M-7-B, from Baa1 to Ba1; class M-8-A, from Baa2 to Ba3; class M-8-B, from Baa2 to Ba3; and class M-9, from Baa3 to B2. "In its analysis, Moody's has combined its published methodology updates as of July 13th, 2007 to the nondelinquent portion of the transactions," the rating agency said. "Collateral backing these transactions is also experiencing higher-than-anticipated rates of delinquency, foreclosure, and REO relative to credit enhancement levels." The collateral backing these classes consists primarily of first-lien, fixed- and adjustable-rate subprime mortgage loans.

Forty-five classes of mortgage-backed securities from several issuers have been downgraded by Fitch Ratings as a result of changes to its subprime loss forecasting assumptions.Fitch also placed 31 classes on Rating Watch Negative and affirmed the ratings on classes with outstanding balances of about $1.5 billion. Among the securities affected by the latest downgrades were: 13 classes from Option One mortgage pass-through certificates; 11 classes from Wells Fargo Home Equity asset-backed certificates; 10 classes from WaMu Home Equity asset-backed certificates; and nine classes of SG Mortgage Securities asset-backed certificates. The rating actions were attributed to changes in 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." The rating agency can be found online at http://www.fitchratings.com.

Twenty-seven classes of certificates from four deals issued by Aegis Asset-Backed Securities Trust in 2005 have been downgraded by Moody's Investors Service.The downgrades were attributed to an analysis of the credit enhancement provided by subordination, overcollateralization, and excess spread relative to expected losses. "A high pipeline of seriously delinquent loans has caused the protection available to those tranches to be diminished," Moody's said. "Losses have eroded the overcollateralization, leaving the rated bonds less protected." The deals are backed by subprime mortgage loans.

Moody's Investors Service has downgraded 121 tranches of securities from four issuers that are backed primarily by first-lien, adjustable-rate, negative amortizing, alternative-A mortgage loans.Moody's also placed under review for possible downgrade 38 tranches of mortgage-backed securities from the four issuers. The downgraded securities are: 73 tranches from 13 deals issued by WaMu Mortgage Pass-Through Certificates in 2006 and late 2005; 25 tranches from seven deals issued by Structured Asset Mortgage Investments II Trust in 2006 and late 2005; 16 tranches from five deals issued by Bear Stearns Mortgage Funding Trust in 2006; and seven tranches from two deals issued by MASTR Adjustable Rate Mortgages Trust in 2006. The negative rating actions were based on higher-than-expected rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels, the rating agency said. Moody's can be found online at http://www.moodys.com.