Servicing

Downey Financial Corp., Newport Beach, Calif., has announced that the company and its subsidiary, Downey Savings and Loan Association, have agreed to consent orders with the Office of Thrift Supervision relating to regulatory capital and real estate disposition, among other things. Downey said the orders "to a large extent, formalize certain measures previously announced by the company to enhance the bank's financial strength." As a result of the orders, Downey also announced the sale of certain noncore real estate assets that produced aggregate cash proceeds of $110 million, adding that it expects to report a net pretax gain of approximately $68 million from the sale. The gain, combined with a dividend to the bank from a wholly owned subsidiary, will result in an increase of approximately $109 million in the bank's regulatory capital, Downey said. Downey chairman Michael Bozarth said the orders "reflect a number of measures that Downey has already taken and, in some cases, is close to completing." The company can be found online at http://www.downeysavings.com.

The preferred stock ratings of Fannie Mae and Freddie Mac have been downgraded by the three major rating agencies in the wake of Sunday's announcement of a federal takeover of the government-sponsored enterprises. The GSEs' preferred stock ratings were downgraded from BBB-minus to C by Standard and Poor's Ratings Services, from Baa3 to Ca by Moody's Investors Service, and from BBB-minus to C/RR6 by Fitch Ratings. In addition, S&P affirmed its long-term senior unsecured debt ratings on Fannie and Freddie at AAA and A-1-plus, respectively, with a stable outlook. It also lowered its risk-to-the-government standalone issuer credit ratings from A-minus to R (regulatory supervision) and withdrew the ratings. S&P said its affirmation of the senior unsecured debt ratings "reflects the explicit government support under the terms of the conservatorship and Treasury's establishment of a preferred stock purchase agreement," the rating agency said. Moody's affirmed its senior and subordinated debt ratings on the GSEs at Aaa and Aa2, respectively. Fitch affirmed its long- and short-term Issuer Default Ratings and senior debt ratings on the GSEs at AAA and F1-plus, respectively, and assigned a stable rating outlook to the long-term IDRs. The downgrade of the GSE preferred stock "reflects the subordination of the preferred to any Treasury interest, and interest payments are unlikely to resume in the foreseeable future," Fitch said. The rating agencies can be found online at http://www.standardandpoors.com, http://www.moodys.com, and http://www.fitchratings.com.

The government takeover of Fannie Mae and Freddie Mac appeared to be a positive for their bonds even though it had decimated their stock as of Monday morning. Multiple Wall Street firms had reported tighter spreads in agency mortgage-backed securities and debt at deadline time as Fannie and Freddie share prices each plummeted into a range around $1 per share. The Treasury's new authority to purchase MBS has reassured some investors who see it as likely to prevent the kind of extreme spread widening and volatility that upset the sector so notably in March, said Art Frank, a researcher at Deutsche Bank Securities. Senior and subordinated debt, meanwhile, have benefited from the limited net issuance and stronger government support resulting from the intervention, according to a Credit Suisse report.

Shares of the government-sponsored enterprises dropped to new lows Monday after the market digested the Treasury Department's proposed bailout, which would inject funds into Fannie Mae and Freddie Mac but significantly dilute the interests of shareholders. Fannie Mae's shares dropped a whopping 89.6% in Monday's trading, closing down $6.31 at $0.73. Freddie Mac was in similar straits, with shares trading at $0.78 after falling 82.8%, or $4.22. Ironically, the rest of the market benefited from news of the rescue plan. The Dow Jones industrial average was up nearly 290 points, over 2.5%, at the close.

If the government-sponsored housing finance enterprises survive, they will do so as a pale reflection of their former selves, an ex-Fannie Mae executive believes. "They will have a smaller, narrower role, if they are going to have a role at all," Adolfo Marzol of Marzol Enterprises, Washington, said at the Consumer Bankers Association's annual Home Equity Lending Conference in Austin, Texas. The GSEs' reduced presence, he told the meeting, will leave the door open for banks and thrifts to return to a much more central position in the mortgage market, a place they all but ceded years ago to mortgage bankers and brokers. It may be business as usual for the GSEs over the next 18-24 months, he said. But "three or four years from now," the market will be totally different, he said. Mr. Marzol, who called the federal takeover of Fannie Mae and Freddie Mac a "monumental" event, spent 10 years at Fannie, including six as executive vice president and chief credit officer. In his last year at the GSE, he served in an interim capacity as the company's chief risk officer.

On Sunday morning the new GSE regulatory agency placed congressionally chartered mortgage giants Fannie Mae and Freddie Mac into separate conservatorships, as the government committed $100 billion to each while removing their CEOs and laying the groundwork for a radical and historic restructuring of the entire U.S. mortgage market. As part of the restructuring plan for the government-sponsored enterprises, the Treasury Department is providing capital and funding support in an effort to boost investor confidence in Fannie's and Freddie's $5.2 trillion worth of debt and mortgage-backed securities. "Monday morning the businesses will open just as usual, only with stronger backing for the holders of MBS, senior debt, and subordinated debt," said James Lockhart, director of the Federal Housing Finance Agency. The Treasury has committed to purchase new Fannie and Freddie MBS, a move that will add liquidity to the mortgage bond market. It will purchase $5 billion worth of agency MBS in September alone. The FHFA dismissed Fannie chief executive officer Daniel Mudd and Freddie chairman and CEO Richard Syron. The two men will stay on in transition roles. Herb Allison, a former vice chairman at Merrill Lynch, was named CEO of Fannie, and David Moffet, former vice chairman of U.S. Bancorp, will lead Freddie. The new CEOs will be charged with examining Fannie's and Freddie's "guarantee fee structure with an eye toward mortgage affordability," Treasury Secretary Henry Paulson said. "The primary mission of these enterprises now will be to increase the availability of mortgage finance," he said. The FHFA director placed the GSEs in conservatorships due to their ailing financial condition and their deteriorating ability to support the mortgage market. Secretary Paulson made conservatorship a prerequisite for providing the two GSEs with quarterly capital infusions to ensure that they maintain a positive net worth. "I support the director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs," Mr. Paulson told reporters Sunday morning. In agreeing to a conservatorship, the GSEs each issued $1 billion in senior preferred stock to the Treasury. With each capital infusion, the Treasury will accumulate more preferred stock. The Treasury also will be issued warrants that give the agency the right to purchase 79.9% of the common shares in each GSE. Meanwhile, the GSEs can increase their MBS purchases by about $100 billion each. But the investment portfolios are capped at $850 billion through 2009. The senior preferred stock covenants also require the GSEs to reduce their portfolios by 10% a year starting in 2010 until the portfolios reach $250 billion. The new conservatorships will not pay dividends on common or preferred stock. The Treasury secretary advised banks and thrifts with large exposures to GSE common and preferred shares to work with their regulators in developing a capital restoration plan.

In response to a story on loan production at GMAC's Residential Capital LLC unit, a company spokeswoman has asked to clarify her statements to MortgageWire. Her statement follows: "ResCap is not making predictions about how our loan volumes will be impacted due to the closure of the retail and wholesale channels. However, we are excited about continuing to originate loans through our ditech.com, GMAC Mortgage direct and correspondent channels." Originally, the spokeswoman said that despite the elimination of the firm's broker channel and traditional retail branches, origination volumes would not decline by much.

Five classes of notes issued by Independence V CDO Ltd., a collateralized debt obligation consisting largely of subprime and alternative-A residential mortgage-backed securities, have been downgraded by Fitch Ratings. The downgrades were as follows: class A-1, from BBB-minus to CCC; classes A-2A and A-2B, from B to C; class B, from CCC to C; and class C, from CC to C. All five classes were removed from Rating Watch Negative. The downgrades were attributed to "significant collateral deterioration" in subprime and alt-A RMBS. More than half of the portfolio, 62.6%, consists of subprime RMBS, while the remainder consists of alternative-A RMBS, 13.3%; commercial MBS, 10.1%; and prime RMBS, CDOs, and other asset-backed securities, 14.0%.

Thirteen certificates from Saxon Asset Securities Trust 2007-3 have been downgraded by Moody's Investors Service. Four of the downgraded certificates will remain on review for possible further downgrade, and six others have been placed on review for possible downgrade. Moody's said the downgrades, in general, were based on higher-than-expected rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels.

The ratings of 135 tranches from 12 alternative-A transactions issued by Washington Mutual have downgraded by Moody's Investors Service. Four of the downgraded tranches remain on review for further possible downgrade. In addition, the ratings on 16 senior tranches were confirmed. The downgrades were attributed, in general, to higher-than-expected rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels. The collateral consists primarily of first-lien, alternative-A mortgage loans. Moody's can be found on the Web at http://www.moodys.com.