Servicing

Moody's Investors Service has downgraded the servicer quality rating of Popular Mortgage Servicing Inc. as a primary servicer of subprime residential mortgage loans from SQ3 to SQ3-minus. Moody's said the downgrade was prompted by the lowering of PMSI's servicing stability assessment from average to below average. That action was based on an announcement by PMSI's parent company, Popular Inc., that it would sell a majority of loans and mortgage servicing rights held by PMSI to Goldman Sachs Mortgage Co.; Goldman, Sachs & Co.; and Litton Loan Servicing LP. Moody's can be found on the Web at http://www.moodys.com.

DBRS has placed all ratings of Washington Mutual Inc. and Washington Mutual Bank Under Review with Negative Implications. The rating agency said the action reflects its concerns that recent market events may hurt WaMu's ability to protect its strong national franchise. (WaMu's issuer and senior debt rating stands at BBB.) DBRS noted WaMu's Sept. 11 release laying out expectations for its third-quarter performance, including lower expected loan-loss provisions. The release reported no change in the company's long-term credit outlook and said liquidity remained stable at approximately $50 billion. "DBRS views liquidity at the holding company level as adequate, with cash to meet its obligations throughout the next several years," the rating agency said. "WaMu expects that capital will remain above well-capitalized levels. Although DBRS currently views liquidity as sufficient, it also realizes that market events can quickly affect the financial flexibility of an organization."

Service Bancorp Inc., the Medway, Mass.-based bank holding company of Strata Bank, has reported that it expects to record a noncash charge in the third quarter for other-than-temporary impairment of its Fannie Mae and Freddie Mac preferred securities. The company said it owns shares of two series of preferred stock issued by Fannie and Freddie that had a cost of $7.2 million as of June 30 and a fair market value of $681,000 as of Sept. 11. Service Bancorp also said it does not expect to realize any material tax benefit in connection with the impairment of the Fannie and Freddie preferred stock. The savings bank can be found on the Web at http://www.stratabank.com.

Fitch Ratings has affirmed the subordinated debt ratings of Fannie Mae and Freddie Mac at AA-minus and removed them from Rating Watch Evolving. The rating outlook is Stable. Fitch said the actions were based on the support represented by senior preferred stock purchase agreements between the U.S. Treasury and the companies. The agreements protect senior and subordinated debtholders from potential losses from the operations of the government-sponsored enterprises because any deficiency of assets versus liabilities will be "made whole" up to $100 billion, Fitch said. As conservator, the Federal Housing Finance Agency has waived the interest deferral triggers of the subordinated debt, assuring timeliness of interest and principal, the rating agency said. "Fitch believes the flexibility provided by the conservatorship in conjunction with the Agreements sufficiently protect the interest and principal payments due, despite the long-term tenor of the subordinated debt and the uncertain structure beyond 2009," Fitch said.

DBRS has placed all ratings of Bank of America Corp., its lead bank, Bank of America NA, and related entities Under Review with Negative Implications in the wake of the Merrill Lynch deal. BoA's issuer and senior debt rating is AA (low). "While this acquisition may yield substantial strategic benefits to Bank of America over the long term, it also involves significant risks," DBRS said. The rating agency also placed all ratings for Merrill and related entities Under Review with Developing Implications. DBRS said Merrill's investment banking and other business lines are performing well, with several producing record revenues. By acquiring Merrill, BoA is "paying a premium over book value to gain a valuable franchise," DBRS said. ".... However, the company will not likely be able to realize the full benefits of this transaction until financial markets stabilize. DBRS does not expect this recovery to occur in the short term." Meanwhile, Merrill's "significant exposure" to asset-backed securities, collateralized debt obligations, residential real estate, and certain other assets presents a risk of "potentially large further losses," DBRS said. The rating agency can be found online at http://www.dbrs.com.

Standard & Poor's Ratings Services has lowered its long-term counterparty credit rating on Bank of America Corp. from AA to AA-minus following BoA's agreement to acquire Merrill Lynch. The long-term ratings of its subsidiaries were also lowered one notch, and those on its holding company and bank subsidiaries were placed on CreditWatch with negative implications. S&P also placed its ratings on Merrill Lynch & Co. and all related entities on CreditWatch with developing implications. The rating actions "reflect the risks of acquiring Merrill Lynch in the present turbulent market environment," said S&P credit analyst John Bartko. S&P noted that the acquisition "takes place on the heels of BoA's recent July 1 acquisition of troubled mortgage lender Countrywide Financial Corp. In our view, the purchase of Merrill will place further pressure on BofA's capital, already strained by the Countrywide acquisition." S&P said Merrill will introduce more residential housing risk to BoA, "notably in the form of its sizable holdings of collateralized debt obligations backed by subprime residential mortgage-backed securities." The rating agency can be found online at http://www.standardandpoors.com.

U.S. regulators said Monday morning they did not see an immediate need to step in on behalf of investors in Lehman Brothers Holdings Inc.'s securities in the wake of the company's bankruptcy filing, which the parent company's broker-dealer is somewhat distanced from. However, there are fears that the move could eventually affect broader mortgage-related securities markets. On Monday morning, Moody's Investors Service analysts in London were examining what the impact of LBHI’s bankruptcy and a downgrade of LBHI's ratings might be on numerous structured finance transactions with exposure to Lehman entities. (The downgrade applied only to the company's corporate ratings, not the exposed structured finance ratings.) The analysts identified residential and commercial mortgage-backed securities as among the asset classes most likely to be affected. Analysts in the New York office of rating agency DBRS further warned "that the liquidation of Lehman's $639 billion balance sheet," which could result from the bankruptcy filing, could "add further pressure to asset valuations and ... also adversely impact other financial services firms, which will have to mark their holdings to market, thus exacerbating the capital and liquidity pressures facing the industry." Lehman's stock was trading at about 15 cents per share at midday Monday.

Wall Street firm Lehman Brothers Holdings Inc., which recently worked out a plan to shed billions of dollars worth of problematic mortgage-related assets and failed to find buyers for itself or its assets over the weekend, has filed for U.S. bankruptcy. The company said it would continue to try to sell its broker-dealer operations and investment management division. Lehman said all its U.S. subsidiaries, including its broker-dealers, would continue to operate. The company said some units would be protected from claims in the bankruptcy filing. "Neuberger Berman LLC and Lehman Brothers Asset management will continue to conduct business as usual and will not be subject to the bankruptcy case of its parent, and its portfolio management, research, and operating functions remain intact," Lehman said. "In addition, fully paid securities of customers to Neuberger Berman are segregated from the assets of Lehman Brothers and are not subject to the claims of Lehman Brothers Holdings' creditors."

Bank of America's deal to buy Merrill Lynch could spell trouble for PHH Corp., which has a mortgage lending and servicing relationship with Merrill. Analysts at FBR Capital Markets note that the lending and servicing contract cannot be terminated until the end of 2010, but say they expect that Bank of America probably will take over Merrill's lending and servicing business at that time. FBR said Merrill accounts for 20%, or $8 billion, of PHH's origination volume. The loss of the Merrill relationship could be "incrementally negative for PHH," an FBR report said. FBR lowered its rating on PHH to "market perform" in the wake of the BoA/Merrill Lynch deal.

Eleven classes of notes issued by two collateralized debt obligations linked to subprime or alternative-A residential mortgage-backed securities have been downgraded by Fitch Ratings. The affected securities include seven classes from Charles River CDO I Ltd./Inc., and four classes from Northlake CDO I Ltd., both structured finance CDOs. All the downgraded classes were removed from Rating Watch Negative, as well as an additional class whose rating was affirmed. The downgrades were attributed variously to collateral deterioration in the portfolios from subprime and alt-A RMBS as well as to underlying exposure to subprime RMBS. Fitch can be found online at http://www.fitchratings.com.