Servicing

The Issuer Default Ratings of Emigrant Bancorp Inc. and its subsidiaries have been downgraded by Fitch Ratings, which cited concerns about Emigrant's capital position and expected losses. The long-term IDR of the parent company was downgraded from BBB to BB-plus, and its short-term IDR was downgraded from F2 to B. The comparable downgrades to its subsidiaries were from BBB to BBB-minus and from F2 to F3, respectively. "While Fitch expects capital to meet the definition of 'well capitalized', both tangible and regulatory capital ratios remain under considerable pressure due to expected recognition of losses in its investment portfolio," the rating agency said. Fitch can be found online at http://www.fitchratings.com.

Andrew Davidson & Co., New York, has announced a new service, Breakpoint Analysis, that it describes as a flexible means of assessing the credit risk of mortgage bonds. Using a distance-to-default measure, Breakpoint Analysis "provides what is in essence a dynamic and timely alternative to a credit rating of the asset as an up-to-date measure of credit risk," AD&Co said. The company said a Breakpoint Ratio is the ratio of the collateral losses required to cause the first dollar of a bond's principal writedown to the projected loss in the base-case economic scenario. The ratio adjusts dynamically to changes in home prices, interest rates, home price forecasts, delinquencies, and deal structure, providing a measure that reflects the current distance to default of each bond. "Credit rating agencies provide a valuable service in addressing structural and legal issues in securitization and establishing initial ratings which reflect a broad range of possible economic environments," Andrew Davidson said. "Breakpoint Analysis adds to this by providing an up-to-date, numerical assessment of changes in credit risk due to changing collateral performance and market conditions. This numerical measure can be used to better understand the evolution of credit risk in a portfolio."

Freddie Mac is getting a "positive" response from a pilot program that is aimed at getting hard-to-reach borrowers who are headed toward foreclosure to consider a loan modification offer. "In this new initiative, servicers solicit seriously delinquent borrowers with a pre-approved modification plan," Freddie chief executive David Moffett recently told a congressional panel. "Notwithstanding the continued difficultly of contacting many borrowers, early results are positive." Freddie is offering to reduce the interest rate on their mortgage by two percentage points and extend the term to 40 years. The mortgage giant launched the "mass modification" pilot program in April.

Deutsche Bank -- once a key player in subprime financing -- believes that as soon the Treasury Department begins purchasing troubled mortgage assets, liquidity will return to the market. In a new research report, chief economist Joseph LaVorgna predicts that even if the Treasury buys a "small amount" of assets, "liquidity will return." He says he believes that, in time, it could lead to a dramatic improvement in pricing. He cautions, however, that Treasury's Troubled Asset Recovery Program could run into problems if financial institutions are valuing their illiquid assets "meaningfully above the government's eventual purchase price." Deutsche Bank says if that's the case, sellers (banks, thrifts, and investment banks, among others) might not participate, defeating the purpose of the program, or they would face significant markdowns as they revalue their assets at the new price, which could raise solvency concerns.

Just after 9:30 Wednesday night, the full Senate passed a $700 billion rescue plan to revive the credit and mortgage markets. The final tally was a lopsided vote of 74 to 25. The passage came two days after Republicans -- fearing a voter backlash at the polls -- torpedoed the House version of the bill. However, senators stuffed their version of the bailout legislation with tax breaks and other sweeteners. House members were slated to return to work Thursday redrafting the bill that was defeated on Monday. It appears that mortgage "cramdown" language will not be included, but some liberal members of Congress are still holding out hope that it may be.

The short-term ratings on six issues of variable-rate single-family mortgage bonds that have liquidity support from Lehman Brothers Commercial Bank have been downgraded from F1-plus to F3 by Fitch Ratings. The affected bonds are: Idaho Housing and Finance Association Single Family Mortgage Bonds Class I Variable Rate Bonds, series 2008 A and 2008 B; and Utah Housing Corp. Single-Family Mortgage Bonds (Master Indenture Dated May 1, 2000) Class I Variable Rate Bonds, series 2006 B, 2006 C, 2006 D, and 2006 E. All the bonds maintain long-term ratings of AAA, and the F3 short-term ratings are on Rating Watch Negative. The management at both housing issuers report that they are seeking replacements for the LBCB liquidity facilities, Fitch said.

The risk of home price declines in the nation's 50 largest housing markets has been "significantly heightened" by rising foreclosures and unemployment, according to PMI Mortgage Insurance Co., Walnut Creek, Calif. According to the PMI U.S. Market Risk Index for Fall 2008, the risk of price declines rose by more than 10% in 16 of the nation's top 50 metropolitan statistical areas, primarily in areas that experienced major house price increases during the housing boom. "The risk of future home price declines increased in 94% of all 381 MSAa in the country this quarter," said David W. Berson, chief economist and strategist for The PMI Group. "The majority of these increases aren't statistically significant -- in many cases, risk increased by less than 10% -- but risk did increase by a significant amount, as much as 30% or more, in some states and MSAs where foreclosures and unemployment increased significantly." PMI can be found online at http://www.pmigroup.com.

Farmer Mac has also announced a $65 million capital infusion from six financial institutions that it says will restore its capital position and meet regulatory requirements. The investors are: AgFirst Farm Credit Bank; AgriBank FCB; CoBank ACB; Farm Credit Bank of Texas; U.S. AgBank FCB; and Zions Bancorporation. "This capital infusion, made by investors who know us well with the full support of our regulator, meets our commitment to satisfy regulatory requirements and support our plans to further our congressional mission for the benefit of farmers, ranchers, and rural residents," said Lowell Junkins, acting chairman of Farmer Mac's board.

Michael A. Gerber has been appointed acting president and chief executive officer of the Washington-based Federal Agricultural Mortgage Corp., succeeding Henry D. Edelman. Mr. Gerber will continue to serve as CEO of Farm Credit of Western New York, an association in the Farm Credit System. In conjunction with Mr. Gerber's appointment, the board of Farmer Mac has formed an Executive Committee of the Board consisting of Mr. Gerber; Lowell L. Junkins, acting chairman of the board; and Dennis A. Everson, president of the Agri-business Division of First Dakota National Bank. Farmer Mac said the committee will work closely with Mr. Gerber and others at the government-sponsored enterprise regarding the company's operations, capital structure, and the search for a permanent CEO. The GSE can be found online at http://www.farmermac.com.

Fannie Mae acquired just $40.48 billion worth of mortgages from its seller/servicers in August, its worst purchase month in several years. The weak showing was not unexpected. In August, both Fannie and Freddie Mac reported to government officials that they were "unable to access capital markets to bolster" their capital positions without financing from the Treasury Department, according to James Lockhart, director of the Federal Housing Finance Agency. August was the last month in which Fannie and Freddie were in operation before being placed in federal conservatorships. Compared with those of August 2007, Fannie's loan purchases fell 38%. Freddie Mac -- which reported its purchase figures last week -- also had a horrible August in terms of loan acquisitions. Freddie bought just $25.77 billion from its seller/servicers, a dramatic 43% decline from the level recorded a year earlier. During the month, both government-sponsored enterprises were sellers of mortgage assets, with Freddie unloading $32.5 billion worth of product, one of its largest sales months ever. The GSEs can be found online at http://www.fanniemae.com and http://www.freddiemac.com.