Servicing

Standard & Poor's Ratings Services has downgraded the counterparty credit rating of Countrywide Financial Corp. from A/A-1 to A-/A-2, while affirming its A/A-1 counterparty credit ratings on Countrywide Bank FSB and Countrywide Home Loans Inc..All ratings are on CreditWatch Negative. The downgrade reflects "the incremental liquidity and earnings stress, as well as our notching criteria and the fact that new debtholders will become subordinate to the operating company's debtholders as the company finalizes its restructuring phase," said S&P credit analyst Victoria Wagner. The affirmations reflect the "strong capital and credit profile" of Countrywide Bank and CHL's ongoing integration into the bank, which S&P said should improve its funding and liquidity profile. The dislocation of the mortgage capital markets has accelerated the integration, so that the bank will now be the primary source of earnings and hold the majority of the consolidated assets, S&P said. S&P can be found online at http://www.standardandpoors.com.

Nervous depositors rushed to pull money out of Countrywide's thrift unit on Thursday, according to a report in the Los Angeles Times.The newspaper did not offer any withdrawal figures, but described the scene at some of Countrywide's branches as something that has not been witnessed since the nation's savings-and-loan crisis of the mid-1980s. The newspaper reported that one depositor who pulled money out was Bill Ashmore, president of Impac Mortgage, an alternative-A lender that competes against Countrywide. (Impac itself is having financial difficulties.) Mr. Ashmore withdrew $500,000 from Countrywide Bank and transferred it to an account at Bank of America.

Shares of Countrywide Financial Corp. rallied about 10% on Friday after the Federal Reserve cut a key interest rate early in the day.Meanwhile, a new analyst report on Countrywide by Morgan Stanley predicts that the nation's largest lender likely "will work out a cash flow positive plan in this challenging environment by migrating mortgage production" to its thrift unit. On Wednesday a Merrill Lynch report called Countrywide's stock a "sell," suggesting that the company could file for bankruptcy protection if the secondary market's liquidity crisis worsens. On Friday morning the Fed slashed the discount rate (the rate it charges banks for loans) to 5.75% from 6.25%, making cheaper financing available to any depository that needs cash. (See story above.)

A bankruptcy filing by Countrywide Financial Corp., Calabasas, Calif., would cause a "psychological impact to the world financial markets [that] would be significant," says National Association of Mortgage Brokers legislative chairman Joe Falk.Speaking at a news conference held by the California Association of Mortgage Brokers at its annual convention in Long Beach, Calif., Mr. Falk maintained that, given Countrywide's market share, there would be a short-term disruption to the marketplace until others picked up the slack. (The issue arose after a Merrill Lynch analyst told clients that if enough financial pressure were placed on Countrywide, it might file for bankruptcy protection.) Ed Smith, the CAMB's vice president of government affairs, added that the failure of any company, not just Countrywide, would put more homeowners in peril and take away their options. CAMB past president John Marcell noted that Countrywide's correspondent channel is the secondary-market outlet for a large number of small and midsize mortgage banks, arguing that if that channel went away it could have a domino effect.

The California Association of Mortgage Brokers has come up with several proposals that it says represent solutions to the current mortgage market crisis for consumers.Speaking at a news conference at the group's annual convention in Long Beach, Calif., Ed Smith, its vice president of government affairs, said the CAMB urges servicers to offer flexible repayment strategies for borrowers facing default and foreclosure, calling it an "extremely important issue for homeowners in California." The CAMB repeated its past call for Congress to declare California to be a "high-cost" state for homeownership. (Right now the only two states with that designation are Alaska and Hawaii.) The group also called on Wall Street to develop lending programs and products attractive to investors and accessible to borrowers. "As has been the case throughout history, markets fluctuate but they always recover," CAMB president Pete Ogilvie said. "CAMB stands ready to work collaboratively with regulators and other stakeholders to stimulate a strong rebound."

To calm financial markets, the Federal Reserve Board has unexpectedly cut the discount rate it charges banks and thrifts for emergency funding by 50 basis points, to 5.75%, and extended the loan terms to 30 days, with the added provision that these credits are renewable.The central bank also made it clear that the depository institutions can use home mortgages and related assets as collateral for these short-term loans. "These changes are designed to provide depositories with greater assurance about the cost and availability of funding," the Federal Reserve said. The Fed's monetary policy committee also issued a statement that lays the groundwork for a future cut in the federal funds rate, which could benefit homeowners who are facing resets on their adjustable-rate mortgages. In acknowledging that financial market conditions have "deteriorated," the committee said, "it is prepared to act as needed to mitigate the adverse effects on the economy arising from disruptions in financial markets."

Sen. Charles E. Schumer, D-N.Y., says he will introduce emergency legislation to raise the caps on Fannie Mae's and Freddie Mac's portfolios if the Bush administration does not act soon.The Office of Federal Housing Enterprise Oversight recently rejected a request by Fannie Mae to lift the cap on its portfolio -- preventing the government-sponsored enterprise from providing liquidity for the subprime market. Sen. Schumer warned that the problems in the subprime sector are spilling over into the broader mortgage market and that the administration should act now. "We cannot afford a 'wait-and-see' approach when it comes to a credit crisis that threatens to derail our economy," the Senate Banking Committee member said. He said he plans to introduce his bill, if necessary, as soon as Congress returns from its August recess after Labor Day.

Class M6 of Meritage Mortgage Loan Trust series 2003-1 has been placed on review for possible downgrade by Moody's Investors Service.The rating action was attributed to credit enhancement levels that may be low given the projected losses on the underlying pools. "Overcollateralization has declined due to losses and the transaction has stepped down, causing the subordinated certificates to start receiving their share of unscheduled prepayments," Moody's said. "In addition, the severity of loss on liquidated loans has begun to increase." The transaction is backed primarily by first-lien adjustable- and fixed-rate subprime mortgage loans originated by Meritage Mortgage Corp.

Forty-one certificates from 13 securitizations issued by First Franklin Mortgage Loan Trust have been placed on review for possible downgrade by Moody's Investors Service.In addition, three classes were placed on review for possible upgrade. "The actions are based on the analysis of the credit enhancement provided by subordination, overcollateralization, and excess spread relative to the expected loss," Moody's said. The collateral consists primarily of first-lien, subprime fixed- and adjustable-rate mortgage loans (except for one transaction backed by closed-end second-lien mortgage loans).

Four tranches from three Merrill Lynch Mortgage Investors Inc. deals issued in 2003 have been downgraded by Moody's Investors Service.The downgrades were as follows: series 2003-WMC1, class B-1, from Baa2 to B1, and class B-2, from Baa3 to Caa1; series 2003-WMC2, class B-2, from Baa2 to B1; and series 2003-WMC3, class B-3, from Baa3 to Ba1. Moody's also confirmed the rating on one Merrill certificate. The downgrades were attributed to credit enhancement levels that are low given the projected losses on the underlying pools. "The pools of mortgages have seen losses in recent months and future loss could cause a more significant erosion of the overcollateralizaton," the rating agency said. The transactions consist of subprime first-lien adjustable- and fixed-rate mortgage loans. Moody's can be found online at http://www.moodys.com.