Servicing

Bears Stearns officials indicated in an Aug. 3 teleconference that the market's recent mortgage-related credit crunch has led to the worst conditions in the fixed-income markets in more than two decades, but said the company is prepared to weather the storm.Comparing the recent credit crunch to other major market disruptions over the past four decades, Bear's chairman and chief executive officer, James E. Cayne, said he believed the company will survive the current crisis as it has past ones. The company's chief risk officer, Michael Alix, said the company has been adjusting its mortgage business accordingly as demand for product in the market has slowed, and it has hedged its positions in troubled asset classes.

Standard & Poor's Ratings Services has revised the outlook for Bear Stearns & Co. from stable to negative in a move the Wall Street firm said it is "disappointed" with.S&P cited Bear's "high degree of reliance on the U.S. mortgage and leveraged finance sectors" in its outlook revision. Bear Stearns said the concerns in these areas "are common to the industry and are not likely to have a disproportionate impact" on the company. "All other major rating agencies have affirmed their stable or positive outlook on Bear Stearns," the Wall Street firm said. S&P can be found on the Web at http://www.standardandpoors.com.

Bear Stearns co-president and co-chief operating officer Warren Spector resigned Aug. 5 in the wake of a costly collapse of two Bear-sponsored hedge funds that invested in risky subprime-related assets.The two funds -- once valued at more than $40 billion -- filed for bankruptcy protection early last week. Bear told investors in the funds that one was worthless, and the other had lost 90% of its value. The two funds were housed in an asset management group that Mr. Spector oversaw. Alan Schwartz, who had been Bear Stearns' other co-president and co-COO, was named sole president. "In light of the recent events concerning [Bear Stearns Asset Management's] High Grade and Enhanced Leverage funds, we have determined to make changes in our leadership structure," Bear chairman and chief executive James Cayne said. "I have every confidence in this team to continue Bear Stearns' 84-year legacy of success and profitable growth." Spector, 49, had spent his entire career at Bear Stearns since joining the firm as a trader in 1983. Bear Stearns can be found at http://www.bearstearns.com.

More than 100 classes of subprime residential mortgage-backed securities with outstanding balances totaling over $3 billion were downgraded by Fitch Ratings on Aug. 2.Fitch also affirmed the ratings on classes with outstanding balances of more than $20 billion. Among the downgrades were: 47 classes from 10 issues of Morgan Stanley mortgage pass-through certificates; 46 classes from nine issues of J.P. Morgan Mortgage Acquisition Corp. asset-backed mortgage pass-through certificates; 20 classes from three ACE Securities mortgage pass-through certificates; and 19 classes from three issues of Societe Generale mortgage pass-through certificates. 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. 2, it had downgraded 291 such classes with an outstanding balance of $5 billion and affirmed the ratings on 526 classes with an outstanding balance of $46 billion.

The residential servicer ratings of American Home Mortgage Servicing Inc. have been downgraded from RPS3-plus to RPS3-minus by Fitch Ratings and placed on Rating Watch Negative.The affected ratings were the company's residential primary servicer ratings for prime product, for alt-A product, and for home equity/home equity lines of credit. (Fitch rates residential servicers on a scale of 1 to 5, with 1 being the highest rating.) "The rating actions reflect the announcement on July 28, 2007, by American Home Mortgage Investment Corp., a real estate investment trust, that it would delay the payment of its common stock dividends to shareholders and will likely delay its interest payments on its cumulative redeemable preferred stock in an effort to preserve liquidity in the face of significant market pressure," Fitch said. "The company also announced significant layoffs and indicated it is facing sizable margin calls and was not able to fund its pipeline." Fitch can be found online at http;//www.fitchratings.com.

Meanwhile, in the wake of the growing subprime liquidity crisis, Countrywide Financial Corp. issued a statement Aug. 2 to reassure the market about the "continuing adequacy" of its liquidity and financial strength."Countrywide has longstanding and time-tested funding liquidity contingency planning," said Eric P. Sieracki, chief financial officer. "These planning protocols were designed to encompass a wide variety of conditions, including recent secondary-market volatility.... We place major emphasis on the adequacy, reliability and diversity of our funding sources. It is important to note that short-term liquidity is used exclusively to fund our highest-credit-quality, most-liquid assets." Mr. Sieracki said there have been no disruptions in financing the company's daily operations, including the placement of commercial paper.

Mortgage companies have cut their payrolls by nearly 46,000 employees since October, including 7,400 full-time positions in June, as the slowdown in mortgage originations, particularly subprime loans, is forcing a retrenchment.The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector fell from 466,200 in May to 458,800 in June. The industry has experienced a 9.1% cutback in the work force since October, when industry employment stood at a 12-month high of 504,700. BLS data are generally good at indicating trends, but slow to react to major changes in the mortgage industry. During the boon years, the BLS data showed that industry employment rose very gradually. But the turmoil in the subprime market could cause significant downdrafts in the months ahead. The BLS can be found online at http://stats.bls.gov.

Three tranches from two deals issued by Credit Suisse First Boston Mortgage Securities Corp. in 2002 and 2003 have been placed under review for possible downgrade by Moody's Investors Service.The affected securities were as follows: CSFB Mortgage-Backed Pass-Through Certificates, series 2002-AR2, classes I-B-1 and I-B-2, and series 2003-AR12, class IV-M-2. The negative rating actions were based on credit enhancement levels that may be inadequate in view of the projected losses on the underlying pools, Moody's said. The collateral backing these classes consists of primarily first-lien, adjustable-rate jumbo A mortgage loans.

Two tranches from CSFB Mortgage-Backed Pass-Through Certificates series 2001-11 have been downgraded by Moody's Investors Service, and two tranches have been placed under review for possible downgrade.Class C-B-3 was downgraded from A2 to Caa1, and class C-B-4 was downgraded from Ba2 to C, while classes C-B-1 and C-B-2 were placed under review. On July 25, three subordinate tranches of the deal were fully written down due to a loss on one loan, and class C-B-3 took a $4,000 writedown, Moody's reported. "Today's actions are the result of these writedowns, and also reflects the continued threat posed by remaining delinquencies in the pool which, although substantially covered by mortgage insurance, may see further high severities," the rating agency said.

Twenty-two classes from 10 second-lien subprime transactions issued in 2007 have been placed on review for possible downgrade by Moody's Investors Service.The rating actions affected deals issued by Ace Securities Corp. Home Equity Loan Trust, American Home Mortgage Investment Trust, Bear Stearns Mortgage Funding Trust, C-Bass Mortgage Loan Asset-Backed Certificates, Greenpoint Mortgage Funding Trust, Nomura Asset Acceptance Corp. Alternative Loan Trust, SACO I Trust, and Terwin Mortgage Trust. In a review of second-lien transactions rated in 2007, Moody's said it found that their projected pipeline losses had "significantly increased over the past few months, likely affecting the credit support for these certificates." The rating agency noted that it recently updated its methodology for rating closed-end second-lien transactions because of "the rapid velocity of early delinquencies and losses in closed-end second-lien subprime loans originated in 2006."