Servicing

Despite raising its loan fees and pricing several times this year, Fannie Mae says it does not expect to see an increase in revenues in the second half and is beginning to see the Federal Housing Administration take away some of its business. "To date we continue to serve about 45% to 50% of the market -- and we have begun to see some of that market we've previously served move over to FHA," said Fannie executive vice president Thomas Lund. Fannie Mae reported $4 billion in revenues for the second quarter but took $5.3 billion in credit-related expenses, including $3.7 billion loan loss provisions and $1.3 billion in actual credit losses (see above item). Fannie executives told investors and equity analysts that they expect credit-related expenses to accelerate in the second half, especially provisions for loan losses. Due to higher defaults and falling housing prices, Fannie said it expects a 23-to-26-basis-point credit loss ratio in the second half, compared with an annualized 15-bp credit loss ratio in the first half. Despite these headwinds, Fannie executives told analysts that they are comfortable with Fannie's current capital position for the rest of 2008 and that there are no plans to tap Treasury for a line of credit, which Congress recently increased.

Fannie Mae has reported a $2.3 billion loss for the second quarter, up slightly from $2.2 billion in the first quarter, and the mortgage giant said it will cut its dividend to 5 cents and stop purchasing alternative-A mortgages later this year. Credit-related expenses rose to $5.3 billion from $3.2 billion in the first quarter, including $3.7 billion in loan loss reserves, Fannie said. Loan chargeoffs jumped to $942 million from $630 million in the first quarter. The deterioration in credit performance of its $310 billion in alt-A loans was "especially pronounced" and was responsible for 50% of the credit losses on its mortgage guarantee business, Fannie Mae reported. The government-sponsored enterprise said it will stop purchasing alt-A loans effective Jan. 1. The company also warned that it is "ramping up" its default reviews to pursue recoveries from alt-A lenders. Fannie Mae can be found on the Web at http://www.fanniemae.com.

Three classes from New Century 2006-S1, a second-lien mortgage-backed securities deal, have been downgraded by Fitch Ratings. The downgrades were as follows: classes A1, A-2A, and A-2B, from B to CCC/DR2. "The rating actions are based on deterioration in the relationship between credit enhancement and expected losses, and reflect continued poor loan performance and home price weakness," Fitch said.

Thirty-six classes of notes issued by six collateralized debt obligations linked to subprime residential mortgage-backed securities have been downgraded by Fitch Ratings and removed from Rating Watch Negative. The affected securities are seven classes from G-Star 2004-4 Ltd. and six classes from G-Star 2005-5 Ltd., both cash flow CDOs; six classes from G-Star 2003-3 Ltd./Corp., a cash flow structured finance CDO; seven classes from E*Trade ABS CDO IV Ltd., a cash flow structured finance CDO; six classes from Vertical ABS CDO 2006-2 Ltd./Corp., a hybrid cash flow and synthetic structured finance CDO; and four classes from Commodore CDO III Ltd./Inc., a cash flow structured finance CDO. The downgrades were attributed to collateral deterioration in, and underlying exposure to, subprime RMBS, as well as (in two cases) structured finance CDOs with underlying exposure to subprime RMBS and (in one case) alternative-A RMBS. Fitch can be found online at http://www.fitchratings.com.

Fitch Ratings has downgraded the preferred-stock rating of Freddie Mac from A-plus to A, while affirming the Issuer Default Ratings of the government-sponsored enterprise. The GSE's long-term IDR was affirmed at AAA, and its short-term IDR was affirmed at F1-plus. Noting that the actions followed Freddie's announcement of a $972 million net loss for the first half, Fitch attributed the downgrade to a greater likelihood that Freddie will eliminate dividends on preferred stock as housing prices decline. It also speculated that the GSE's expected capital raise "may meet market resistance" and that the way the issue is structured (between preferred and common stock) may affect Freddie's preferred-stock ratings. Fitch can be found on the Web at http://www.fitchratings.com.

Connecticut Attorney General Richard Blumenthal is the latest state AG to file suit against Countrywide Financial Corp. for allegedly pushing consumers into deceptive, unaffordable loans and workouts, and allegedly charging homeowners in default unjustified and excessive legal fees. Mr. Blumenthal's lawsuit, filed in Superior Court in Hartford, seeks restitution of up to $100,000 per violation of state banking laws and up to $5,000 per violation of state consumer protection laws. "Countrywide conned customers into loans that were clearly unaffordable and unsustainable, turning the American Dream of homeownership into a nightmare," Mr. Blumenthal said in a statement. "When consumers defaulted, the company bullied them into workouts doomed to fail. Countrywide crammed unconscionable legal fees into renegotiated loans, digging consumers deeper into debt." A spokeswoman for Bank of America, which now owns Countrywide, said in a statement: "While we cannot comment on pending litigation, we will respond to the AG in due course."

Nearly 7% of alternative-A mortgages originated in the first half of 2007 are already 90 days or more delinquent or in foreclosure, according to the Federal Deposit Insurance Corp. The early default rate for alt-A mortgages originated in 2006 was only 3.59%, according to an analysis by FDIC using LoanPerformance data on private-label securities. FDIC researchers suspect that the deterioration in the performance of the 2007 vintage largely reflects conditions in housing markets rather than underwriting. Meanwhile, investors will be looking to see how the $300 billion in alt-A mortgages guaranteed by Fannie Mae performed in the second quarter when the mortgage giant reports its earnings Friday morning. These stated-income loans, which are generally made to self-employed borrowers with high credit scores, constituted 12% of Fannie's single-family book of businesses in the first quarter and were responsible for 43% of its credit losses. Fannie executives maintain that the default rate on their alt-A loans is "approximately one half" the default rate on the overall private-label alt-A market.

Deutsche Bank AG took 2.3 billion euros ($3.6 billion) in total writedowns in the second quarter that were partially related to residential mortgage-backed securities (not 2.3 billion euros in RMBS writedowns, as MortgageWire originally reported). The writedowns "were recorded on residential mortgage-backed securities (predominantly alt-A), monoline insurers, commercial real estate, leveraged finance loans and loan commitments, and other positions," the company said.

Eleven classes of notes issued by two collateralized debt obligations linked to subprime residential mortgage-backed securities have been downgraded by Fitch Ratings. The affected securities are six classes from Duke Funding IX Ltd./Corp., a hybrid cash and synthetic structured finance CDO; and five classes from Porter Square CDO III Ltd./Inc., a cash flow structured finance CDO. The downgrades were attributed to "significant collateral deterioration" in the portfolios' subprime RMBS. In the case of Duke Funding IX, the downgrade was also attributed to alternative-A RMBS, and in the case of Porter Square III, it was also attributed to structured finance CDOs with underlying exposure to subprime RMBS. Fitch can be found online at http://www.fitchratings.com.

FirstFed Financial Corp., Los Angeles, has reported a net loss of $35.5 million ($2.60 per share) for the second quarter, citing a $90.2 million provision for loan losses linked to chargeoffs, modifications, and nonaccrual of single-family mortgage loans. FirstFed noted that the loss and the loan-loss provision were down from those of the first quarter, which were $69.8 million ($5.11 per share) and $150.3 million, respectively. A year earlier, FirstFed recorded net income of $29.1 million ($1.74 per share) and a loan-loss provision of $3.1 million. The bank said its higher levels of single-family nonaccrual loans (those more than 90 days delinquent or in foreclosure) "are the result of the large numbers of adjustable-rate mortgages that faced a recast of their payment amount in the latter part of 2007 and early 2008."