Servicing

Twenty-five tranches from five "scratch-and-dent" mortgage transactions have been placed on review for possible downgrade by Moody's Investors Service. The transactions include two by American Home Mortgage issued in 2007, one by Truman Capital Mortgage Loan Trust issued in 2006, one by Ace Securities Corp. Home Equity Loan Trust issued in 2006, and one by Bear Stearns Asset Backed Securities I Trust issued in 2004. Many scratch-and-dent pools originated since 2004 are exhibiting higher-than-expected rates of delinquency, foreclosure, and real estate owned, the rating agency said. Moody's said the actions are part of a wider review of all residential mortgage-backed securities transactions "in light of the deteriorating housing market and rising delinquencies and foreclosures." The collateral in all the deals consists primarily of first-lien, fixed- and adjustable-rate, scratch-and-dent mortgage loans.

Class B of CSFB Mortgage Pass-Through Certificates series 2003-CF14 has been downgraded from B1 to Caa1 by Moody's Investors Support. Many "scratch-and-dent" pools originated since 2004 are exhibiting higher-than-expected rates of delinquency, foreclosure, and real estate owned, the rating agency said. Moody's said the actions are part of a wider review of all residential mortgage-backed securities transactions "in light of the deteriorating housing market and rising delinquencies and foreclosures." The collateral consists primarily of first-lien, fixed- and adjustable-rate, scratch-and-dent mortgage loans.

Forty-three tranches from three alternative-A transactions backed by SunTrust-originated mortgage loans have been downgraded by Moody's Investors Service. Nine tranches were placed on review for possible further downgrade. The downgrades -- from SunTrust Alternative Loan Trust and Bear Stearns Asset Backed Securities I Trust deals -- were based, in general, on higher-than-expected rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels, the rating agency said. The collateral consists primarily of first-lien, fixed-rate, alt-A mortgage loans. Moody's can be found on the Web at http://www.moodys.com.

The preferred stock ratings of Fannie Mae and Freddie Mac have been downgraded from A1 to Baa3 by Moody's Investors Service, and their Bank Financial Strength Ratings have been downgraded from B-minus to D-plus. The downgraded ratings remain on review for possible further downgrade. Moody's said the downgrades of the financial strength ratings reflect its view that the government-sponsored enterprises' flexibility to manage volatility in their mortgage risk exposures is "constricted" because they now have "limited access to common and preferred equity capital at economically attractive terms." The downgrades of the preferred stock ratings reflect a greater risk of dividend omission stemming from two issues, Moody's said. First, the GSEs' mortgage portfolio performance is "worse and more volatile than Moody's expected," which could lead them to breach the capital requirements governing their ability to pay a preferred dividend. Second, there is uncertainty about how the preferred stock would be treated if the Treasury provides either GSE with support, Moody's said. In addition to the downgrades, Moody's affirmed the GSEs' Aaa senior long-term debt and Prime-1 short-term debt ratings with stable outlooks, while their Aa2 subordinated debt ratings were affirmed, but the outlook was changed from stable to negative.

To encourage more loan modifications, the Federal Housing Administration will allow servicers to increase the interest rate on the loan to reduce the investor's loss when it is sold or repooled. The FHA set the maximum interest rate increase at 200 basis points above the 10-year Treasury rate, according to FHA mortgagee letter 2008-21. Mortgage servicing consultant Bob Lyons noted that it is difficult to sell modified loans at par in today's market environment and that servicers have to consider that in deciding to do a loan modification. The FHA is "trying to give them a little more latitude," he said, provided the borrower can afford payments and it results in a performing loan. Mr. Lyons' firm, Lyons McCloskey, is based in Fairfax Station, Va. The FHA is also encouraging servicers to undertake loan modifications even after the borrower has filed for foreclosure. According to the mortgagee letter, servicers can add legal fees and other expenses related to a canceled foreclosure action into the principal amount of a modified loan.

Four classes of notes issued by Enhanced Mortgage Backed Securities Fund IV Ltd. have been downgraded by Fitch Ratings, and the ratings have been withdrawn. The downgrades were as follows: class A-2, from B to C/DR4; class A-3, from B-minus to C/DR6; class A-4, from CCC to C/DR6; and preference shares, from CCC/DR6 to C/DR5. The rating actions were based on the liquidation of the transaction's portfolio, Fitch said.

Seven classes of notes issued by one collateralized debt obligation linked to subprime residential mortgage-backed securities has been downgraded by Fitch Ratings. All the downgraded classes were removed from Rating Watch Negative. The affected securities are as follows: seven classes from Bluegrass ABS CDO III Ltd., a cash flow structured finance CDO. The downgrade was attributed to collateral deterioration in subprime RMBS and structured finance CDOs with underlying exposure to subprime RMBS.

First Place Financial Corp., a small Ohio thrift, says it will write down the value of its Fannie Mae preferred stock by $1.3 million and, according to one stock analyst, "a wave of writedowns could be coming for smaller banks." FPFC of Warren, Ohio, declared that its investment in Fannie Mae preferred stock is now in a category called "other-than-temporary," which means it will take a loss on the shares that will flow through to earnings, thus reducing its net income. If FPFC felt it could recover its investment in Fannie's preferred stock it would not have to label the investment "other than temporary" and could avoid taking the charge to earnings. The writedown affects the thrift for the period ending June 30. Daniel Arnold, a stock analyst who covers FPFC for Sandler O'Neill, told MortgageWire that the thrift is not the first financial institution to take a hit on its investment in Fannie Mae's preferred shares, noting that "some big banks have taken hits, but the little ones have not."

Fifteen classes of notes issued by two collateralized debt obligations linked to subprime residential mortgage-backed securities have been downgraded by Fitch Ratings. All the downgraded classes were removed from Rating Watch Negative. The affected securities are as follows: eight classes from Fourth Street Funding Ltd./LLC and seven classes from Jupiter High-Grade CDO VII Ltd./Inc. Both are cash CDOs. The downgrades were attributed to collateral deterioration in subprime RMBS and structured finance CDOs with underlying exposure to subprime RMBS.

Liquidity pressures are limiting the ability of asset managers to remove underperforming loans from U.S. commercial real estate loan CDOs, according to Fitch Ratings. The rating agency said its delinquency index for CREL collateralized debt obligations increased to 1.46% in July, up from 0.36% in October 2007 when Fitch began tracking the numbers. Karen Trebach, a Fitch senior director, said the CREL CDO index has remained relatively low partly because asset managers had been removing underperforming loans, but that many now face capital constraints that will hamper their ability to keep doing so. "Reduced CDO cushions are becoming more commonplace with the dual pressures of reduced liquidity and increased delinquencies," Ms. Trebach said. "Constrained liquidity may also lead to more managers' modifying and extending loans rather than repurchasing them, which, if not merited, may only serve to delay the possible realization of losses on these loans." Fitch can be found on the Web at http://www.fitchratings.com.