Servicing

The ratings of American International Group Inc. and its insurance and financial services subsidiaries have been placed on Rating Watch Negative by Fitch Ratings, partly as a result of exposures to residential mortgage-backed securities. Fitch previously had a negative rating outlook on AIG and the majority of its insurance-related subsidiaries that are rated by Fitch, and a stable rating outlook on AIG's financial services subsidiaries (including AIG Capital Corp., International Lease Finance Corp., and American General Finance Inc.). Fitch said the rating actions were based on an updated assessment as part of its ongoing ratings review of AIG and its subsidiaries. The actions reflect "Fitch's uncertainty regarding potential outcomes of AIG's previously announced business unit review, which is expected to be completed in late September," the rating agency said. The actions also reflect uncertainty related to AIG's "potential for additional losses" on various exposures to residential mortgage-backed securities, Fitch said. The rating agency can be found online at http://www.fitchratings.com.

Nearly 60% of 278 economists expect a special Federal Housing Administration refinancing program to reduce mortgage foreclosures, according to a survey by the National Association of Business Economists. But "only 34% feel it will help hasten the housing recovery and only 31% say it will help stabilize housing prices," said the NABE, which polled its members from July 25 to Aug. 11. President Bush signed the housing legislation that recreated the FHA refinancing program on July 30. The housing bill also expanded Fannie Mae's and Freddie Mac's lines of credit at the U.S. Treasury and granted the Treasury secretary the authority to purchase stock in the two government-sponsored enterprises. "With regard to possible Treasury support of the GSEs, fully 75% agree that these institutions are 'too important to fail,' and only 20% felt that such assistance would necessarily amount to nationalization," the NABE said.

Citigroup, in a new report, says it is unlikely that the federal government will nationalize Fannie Mae and Freddie Mac, while admitting that in time some type of federal action may be necessary. The report says the government-sponsored enterprises are not entirely without options, adding that their new regulator, the Federal Housing Finance Agency, could ease "the arbitrary capital surplus requirement further." It adds, "given our analysis, which shows that both [Fannie Mae and Freddie Mac] should have sufficient capital through (at least) year-end 2008 under a variety of negative credit scenarios, all parties could wait-it-out until market conditions improve." In Monday's trading, Freddie's share price was up 15% at one point to $3.26, while Fannie's was up 5% to $5.24.

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.