Servicing

DBRS, a Toronto-based rating agency, has downgraded 63 classes of residential mortgage-backed securities from 21 RMBS transactions.DBRS also placed five other classes under review with negative implications, and upgraded one class. The negative rating actions were based on an increase in the pipeline of 90-day-plus delinquencies relative to the available credit enhancement, the rating agency said.

Fitch Ratings has placed all classes of 58 U.S. RMBS subprime transactions backed by pools of closed-end second-liens on Rating Watch Negative.The 58 transactions -- 35 of which were originated in 2005, 22 in 2006, and one this year -- have an aggregate outstanding balance of approximately $12.1 billion, the rating agency reported. The transactions constitute "the entirety of Fitch's rated portfolio" of closed-end second-lien residential mortgage-backed securities from those vintages. "Although the performance of individual transactions varies, the CES sector as a whole has significantly underperformed from original expectations," Fitch said. "Ongoing pressure from the combination of a declining housing market, weak loan underwriting standards, and interest rate resets on the associated adjustable-rate first liens has led to high delinquencies, rising losses, and a rapid deterioration of credit enhancement for these securities." Fitch can be found online at http://www.fitchratings.com.

Fannie Mae reported 2006 earnings of $4.1 billion, down from $6.3 billion in the prior year, due to a 41% drop in net interest income and a 22% drop in the profitability of its single-family business.The mortgage giant said net income from the single-family business fell to $2.04 billion last year, despite an increase in revenues. Fannie attributed the drop-off in profitability to a $308 million increase in losses on single-family guaranty contracts, a $533 million increase in administrative costs, a $123 million increase in loan loss reserves, and a $218 million increase in foreclosure expenses. "We anticipate the losses we incur at inception of guaranty contracts will more than double in 2007 compared to 2006, primarily as a result of the decline in home prices, as well as continued investment in loans that support the company's housing goals," the government-sponsored enterprise said. Fannie executives also affirmed that the publicly traded company will file its 2007 annual report by the end of February 2008, which would be in compliance with the Securities and Exchange Commission's filing deadline. The GSE can be found online at http://www.fanniemae.com.

Countrywide Financial Corp. saw its share price plunge Wednesday to a four-year low ($19.25) after a Merrill Lynch analyst told clients that if enough "financial pressure is placed" on the nation's largest lender it may file for bankruptcy protection.At deadline time, Countrywide chairman and chief executive Angelo Mozilo was in meetings and could not be reached for comment. Rumors also began anew that it might be talking to potential suitors, including Bank of America. Meanwhile, sources told MortgageWire that CFC was contemplating exiting the correspondent loan market where it is, by far, the largest player. The Merrill report notes that Countrywide, which owns a depository, has $185 billion in credit facilities available to the company but that the lines of credit can be "terminated or changed meaningfully." Merrill downgraded the stock to "sell" from a "buy." Though Countrywide's shares traded as low as $19.25 on Wednesday, the price recovered to $20.84, down 15% on the day.

The beleaguered Countrywide Home Loans, Calabasas, Calif., is expected to shift its production into mostly GSE and government-backed loans as the secondary market's liquidity crisis worsens, according to a new report issued by Credit Suisse.Countrywide is not only the nation's largest overall residential funder, but the biggest subprime originator as well, according to National Mortgage News. In the subprime sector, it has a market share of 8.87%. The Credit Suisse report says the lender will shift "its origination mix towards predominantly [government-sponsored enterprise] eligible paper, which solidifies its ability to sell its production. Clearly, origination volumes should decline dramatically in the present environment." CS analyst Moshe Orenbuch notes that Countrywide has now tapped an $11.5 billion credit facility, 70% of which has an existing term greater than four years. He writes that the short-term financing market "has virtually shut down." In response to Countrywide's liquidity problems, Fitch Ratings downgraded the company's long-term issuer default rating from A to BBB-plus, citing "the unprecedented disruption in the capital markets." Moody's Investors Service downgraded the senior debt ratings of Countrywide and its parent company, Countrywide Financial Corp., from A3 to Baa3 and the rating on deposits of Countrywide Bank FSB from A2 to Baa1.

Three classes of notes issued by Taberna Preferred Funding II Ltd., a collateralized debt obligation consisting in part of securities issued by real estate investment trusts, have been placed on Rating Watch Negative by Derivative Fitch.The affected securities were the class E-1, class E-2, and class F notes. Taberna II is a CDO backed primarily by trust-preferred securities issued by REITs and homebuilders. The negative rating actions were attributed to "the rapid deterioration in the credit quality of several residential mortgage REITs underlying the transaction," including two unnamed REITs that recently filed for bankruptcy protection. The rating agency can be found online at http://www.derivativefitch.com.

Three classes of notes issued by E*Trade ABS CDO I Ltd/LLC have been downgraded by Fitch Ratings and removed from Rating Watch Negative.The downgrades were as follows: class B, from BBB to B/DR1; class C-1, from CC/DR3 to C/DR6; and class C-2, from CC/DR3 to C/DR6. Fitch also affirmed the rating on one other class in the deal. E*Trade I is a static cash flow collateralized debt obligation backed by collateral consisting of asset-backed securities, residential mortgage-backed securities, commercial mortgage-backed securities, and other CDOs. The downgrades were attributed to collateral deterioration and decreased credit enhancement. The securities were placed on Rating Watch Negative on July 12 due to the negative credit migration of subprime RMBS assets.

The ratings of Irwin Home Equity Corp. as a primary servicer of second-lien and of high loan-to-value residential mortgage loans have been downgraded from SQ2-plus to SQ2-minus by Moody's Investors Service.The ratings remain on review for possible downgrade, and Moody's has reduced the company's servicing stability assessment from average to below average. Moody's said the actions reflect the volatility in the market for second-lien and high-LTV loans, and the second-quarter earnings announcement of the parent corporation, Irwin Financial, which "noted the negative performance of the Irwin Home Equity line of business." Sustained negative performance could affect the willingness and ability of the parent corporation to invest in the servicing platform. "Additionally, there is uncertainty in the company's ability to maintain its servicing performance, staffing levels, turnover rates, and the composition of the management team," Moody's said.

UBS has increased its net income in the latest quarter more than 70% despite charges from the closure of a troubled U.S. mortgage unit, but it is warning that future results may be less favorable if the market's wider credit crunch continues."If the current turbulent conditions prevail throughout the quarter, UBS will probably see a very weak trading result in the investment bank, offset by predictable earnings from wealth and asset management," the company said. "This makes it likely that profits in the second half of 2007 will be lower than in the second half of last year." During the second quarter, net profit to shareholders at the company was up 72% compared with that of the previous quarter and 79% compared with that of a year earlier.

KKR Financial Holdings, a publicly traded affiliate of buyout firm Kohlberg, Kravitz, Roberts & Co., says it will take a $40 million loss on the sale of $5.1 billion of residential mortgage loans.The company bought floating-rate and hybrid-rate assets that were hedged with interest rate derivatives. KKR Financial continues to own $5.8 billion of home loan assets, mostly in the form of mortgage-backed securities, after the sale. Because of volatility in the secondary market, KKR Financial said it may have to record an additional charge of $200 million to $250 million to resolve potential funding disruptions. The company said its portfolio consists of home loan assets with a weighted average FICO score of 728 and a weighted average loan-to-value ratio of 71%. KKR Financial Holdings said it no longer intends to invest in residential home loan assets and will dispose of its portfolio either through runoff or through a "strategic alternative," which may include a sale of the common stock of its REIT subsidiary. KKR can be found on the Web at http://www.kkrfinancial.com.