Servicing

Freddie Mac has not yet asked its regulator for permission to increase its portfolio caps in the wake of a widening liquidity crisis in the nonconforming sector, industry sources have told MortgageWire.A Freddie Mac spokeswoman declined to comment on the matter. However, in a June conference call with analysts, Freddie Mac chief financial officer Buddy Piszel reported that the government-sponsored enterprise is "beginning" to have discussions with its regulator in regard to its portfolio caps. (Mr. Piszel's comments were made before the nonprime sector's liquidity worsened.) At the end of June, Freddie's on-balance-sheet holdings totaled $720 billion, about $20 billion shy of its cap. MW and other news media outlets reported Aug. 6 (see item above) that Fannie Mae -- reacting to the requests of its seller/servicers -- recently asked its regulator for permission to increase its on-balance-sheet holdings in order to provide liquidity to the secondary mortgage market. Freddie Mac can be found online at http://www.freddiemac.com.

Fannie Mae -- reacting to the requests of seller/servicers -- has asked its regulator for permission to increase its on-balance-sheet holdings in order to provide liquidity to the secondary mortgage market, sources have told MortgageWire.At deadline time, representatives of Fannie Mae and the Office of Federal Housing Enterprise Oversight declined to comment. Fannie, which is struggling to get current on its financial reporting, has been operating under portfolio caps since late 2005. The cap is currently set at $720 billion. With Wall Street conduits shutting down or tightening loan standards, conforming lenders that play in the nonprime market cannot sell their loans in the secondary market. (At deadline time, the bank-owned National City Home Equity, a unit of National City, told its loan brokers that it would suspend the taking of new applications, according to sources.) Fannie Mae can be found online at http://www.fanniemae.com.

Two classes of American Home Mortgage Assets Trust residential mortgage-backed certificates have been placed on Rating Watch Negative by Fitch Ratings.The affected securities are class 3M4 of series 2005-1 group 3 and class 1B5 of series 2005-2 group 1. Fitch also affirmed the ratings on 15 classes from two AHMAT transactions. The negative rating actions were attributed to a deterioration in the relationship between credit enhancement and loss expectations.

Two classes of CWALT Inc. Alternative Loan Trust series 2006-18CB mortgage pass-through certificates have been placed on Rating Watch Negative by Fitch Ratings.The affected securities are classes B-3 and B-4. Fitch also affirmed the ratings on four classes from the transaction. The negative rating actions were based on "early trends in the relationship" between serious delinquency and credit enhancement, the rating agency said. The certificates are collateralized chiefly by conventional 15- and 30-year fixed-rate mortgage loans originated under Countrywide Home Loans Inc.'s standard underwriting guidelines and extended to prime borrowers, or under its expanded underwriting guidelines and extended to alternative-A borrowers, Fitch reported.

Seven classes of notes issued by ACA ABS 2003-1 Ltd. and ACA ABS 2003-2 Ltd. have been downgraded by Fitch Ratings as a result of deterioration in subprime residential mortgage-backed securities.The downgrades were as follows: series 2003-1, class C, from A-plus to BBB, and class D, from BBB to B-plus and removed from Rating Watch Negative; and series 2003-2, class A-2, from AA to A, class A-3, from A to BBB-minus, class B-F, from BBB to B-plus and removed from Rating Watch Negative, class B-V, from BBB to B-plus and removed from Rating Watch Negative, and class C, from BB to B and removed from Rating Watch Negative. Fitch also affirmed the ratings on eight classes in the two deals. Citing "the significant collateral deterioration" in the portfolios, especially of subprime RMBS, Fitch said they contain a significant exposure to subprime closed-end second lien RMBS assets, including underperforming 2006 vintage bonds. Since the beginning of 2007, approximately 20% of the portfolio assets have been downgraded, and approximately 10% are on Rating Watch Negative, Fitch said. The majority of the actions have occurred in the last three months, driven by credit deterioration in subprime RMBS bonds from the 2005 and 2006 vintages, including subprime closed-end second lien RMBS bonds, the rating agency said.

More than 90 classes of subprime residential mortgage-backed securities with outstanding balances totaling over $1.25 billion were downgraded by Fitch Ratings on Aug. 3.Fitch also affirmed the ratings on classes with outstanding balances of more than $10.5 billion. Among the downgrades were the following mortgage pass-through certificates: 28 classes from three issues of HSI Asset Securitization Corp.; 15 classes from three issues of Mortgage Asset Securitization Transactions Asset Back Securities Trust; 15 classes from two Citigroup issues; and 12 classes from three issues of Asset Backed Securities Corp. The rating actions were based on changes to Fitch's subprime loss forecasting assumptions, which "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 said. Fitch reported that as of the end of the day on Aug. 3, it had downgraded 389 such classes (from subprime RMBS deals placed Under Analysis on July 12) with an outstanding balance of $7 billion, and affirmed the ratings on 721 classes with an outstanding balance of $58 billion. Fitch can be found online at http://www.fitchratings.com.

The credit performance of alternative-A loans is expected to tumble over the winter, with the default rate hitting 4% by the end of next May, up 45% from the current default rate, according to a Friedman Billings Ramsey report.The default rate on alt-A mortgages stood at 2.69% this past May after rising for 24 consecutive months. The FBR report says the performance of alt-A loans, which have higher credit scores than subprime loans, will "worsen relatively much more in the year ahead" than subprime and prime loans that are placed in private-label securities. "As the negative news about the mortgage and corporate debt markets became a tsunami last week, we updated our econometric models, and offer the following forecasts of the default rates of prime, Alt-A and subprime loans through May 2008," the Aug. 3 FBR report says. The default rate on "subprime loans should rise to 14.57%" in May 2008 from 12.4% in May of this year, while the default rate on "prime loans should rise to 0.53%" in May 2008 from 0.37% currently, according to the FBR researchers. (The default rate includes loans that are 90 days or more past due, in foreclosure, or real estate owned.)

Two bond market associations are urging the Federal Reserve Board to be careful in writing new rules to stop abusive subprime lending practices and to ensure that any violations of its Home Ownership and Equity Protection Act regulation do not trigger assignee liability for mortgage investors."At a minimum, we request that, in any proposed and final regulations under Section 129, the Board explicitly confirm that violations of new substantive regulations may not be asserted against an assignee (unless the related loan is a high cost loan)," says a joint comment letter by the American Securitization Forum and the Securities Industry and Financial Markets Association. (The vast majority of subprime mortgages are not "high-cost loans" as defined by HOEPA.) The ASF and SIFMA also urge the Fed to concentrate on improving mortgage disclosures as the best way to protect consumers, as opposed to restricting prepayment penalties or requiring escrow accounts on subprime loans. "In our view, the Board should focus its efforts on preventing unfair and deceptive lending practices in connection with HOEPA loans through creating uniform mortgage disclosures for borrowers, and not prohibiting products or features that are not inherently unfair or deceptive."

Investment banker Nomura Securities has closed its nonconforming mortgage conduit and laid off staff in its fixed-income research department, industry sources have told MortgageWire.Meanwhile, one executive close to Wall Street said three major investment banking houses he has done business with are "prepping" their mortgage departments for layoffs. At deadline time, a Nomura spokesman had not returned telephone calls. Nomura exited the mortgage trading business last fall, when it shifted its mortgage origination/purchase business into a dedicated company with an asset management unit.

Fears of a worsening credit crunch triggered a sell-off in the stock market Friday that took a heavier toll on mortgage stocks than on the market as a whole.The Dow Jones industrial average fell 281 points, or 2.1%, on the day, but 16 of the 18 mortgage stocks tracked by MortgageWire declined by higher percentages. NetBank, an online bank, and Radian Group, a mortgage insurer, led the downturn among these mortgage stocks, as NetBank's share price fell $0.05, or 18.5%, and Radian's fell $3.75, or 14.2%. Other mortgage stocks that fell more than 5% on the day were Franklin Bank, down 10.7%; LandAmerica Financial, down 9.6%; Doral Financial, down 9.1%; Triad Guaranty, down 8.8%; PMI Mortgage, down 7.7%; Delta Financial, down 7.0%; Countrywide Financial Corp., down 6.6%; IndyMac Bancorp, down 6.6%; Washington Mutual Inc., down 6.6%; and Kaufman & Broad, down 5.4%. News reports attributed the stock plunge to remarks by Bear Stearns officials saying that the mortgage-related credit crunch has led to the worst conditions in the fixed-income markets in more than two decades (see item above). As of around 1 p.m. Monday, the Dow was up by more than 90 points.