Servicing

Sixty classes from 12 residential mortgage-backed securities deals backed by alternative-A mortgage loan collateral issued in 2005, 2006, and 2007 have been downgraded by Standard & Poor's Ratings Services. S&P also removed 41 of the ratings from Credit Watch with negative implications, affirmed the ratings on 89 other classes, and removed those ratings from Credit Watch negative. The rating agency attributed the downgrades to "our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings given our current projected losses." All the transactions are backed by fixed-rate loans or by adjustable-rate loans with initial reset periods of at least five years, S&P said.

Standard & Poor's Ratings Services has placed 206 classes from 94 U.S. cash flow and hybrid collateralized debt obligations of asset-backed securities on CreditWatch negative. S&P attributed the negative rating actions to "continued deterioration in the credit quality of the residential mortgage- backed securities backing these CDO transactions." The rating agency said 58 of the 94 affected CDOs are mezzanine structured finance CDOs collateralized substantially by RMBS and other structured finance assets rated single-A and triple-B at origination. Twenty-six are high-grade structured finance CDOs of ABS backed largely by RMBS and other structured finance assets rated single-A through triple-A at origination, and the remaining 10 are CDOs of CDOs backed chiefly by tranches from other CDO transactions, the rating agency said.

Standard & Poor's Ratings Services has lowered its ratings on 171 tranches (totaling $29.46 billion) from 43 U.S. cash flow and hybrid collateralized debt obligation transactions. The rating agency also removed 93 of the downgraded ratings from CreditWatch with negative implications and affirmed four ratings and removed them from CreditWatch negative. S&P said 27 of the affected transactions are mezzanine structured finance CDOs of asset-backed securities, which are collateralized largely by mezzanine tranches of residential mortgage-backed securities and other structured finance securities. Twelve are "high-grade" structured finance CDOs of ABS, which the rating agency defined as those backed at origination primarily by tranches of RMBS and other structured finance assets that are rated from single-A through triple-A. The other four are CDOs of CDOs backed chiefly by notes from other CDOs. The downgrades reflect various factors, including credit deterioration and recent negative rating actions on subprime RMBS securities, the rating agency said. S&P can be found on the Web at http://www.standardandpoors.com.

The CPS2 commercial mortgage-backed securities primary servicer rating of Capstone Realty Advisors LLC has been placed on Rating Watch Negative by Fitch Ratings. The rating action was attributed to a notice that the entire senior management team is leaving the company. "In addition, Capstone's parent company, National City Corp., is currently rated A by Fitch with a negative outlook," the rating agency said. Fitch rates commercial mortgage servicers on a scale of 1 to 5, with 1 being the highest rating. Fitch can be found on the Web at http://www.fitchratings.com.

Barclays PLC, London, continued to suffer mortgage-related writedowns in the first half of this year, but saw 2.75 billion pounds ($5.34 billion) of group pretax profit during the period. Group chief executive John Varley said the pretax figure was positive in that it represented stable year-over-year income. But the company's net income attributable to shareholders for the first half, 1.72 billion pounds ($3.34 billion), was "acutely disappointing" in that it represented a 33% decline in profit, he said. During the period, Barclays saw more than 2 billion pounds ($3.9 billion) in total charges and impairments that were partially related to U.S. mortgages. U.S. subprime mortgage-related charges and other credit market exposures represented about 1.1 billion pounds ($2.1 billion) of those total writedowns.

Ambac Financial Group Inc., New York, has reported that under U.S. accounting rules it generated net income of $823.1 million in the second quarter despite mortgage-related losses. But the bond insurer said it would have taken a net loss for the quarter if a number of items normally excluded by research analysts were removed. "The increase in the second quarter of 2008 is primarily due to recording net mark-to-market gains on credit derivatives, increased accelerated premiums from refundings, and loss reserve reductions on the direct residential mortgage-backed securities portfolio, partially offset by market losses on RMBS within the financial services investment portfolio," the company said. Ambac can be found on the Web at http://www.ambac.com.

LIUNA is calling on Fannie Mae and Freddie Mac to exercise greater scrutiny of mortgages originated by corporate homebuilders, saying the economy faces a ticking time bomb set to go off in 2010 when five-year adjustable-rate mortgages start resetting. In a new report, the Laborers' International Union of North America said over a third of all mortgages originated by lending subsidiaries of Richmond American, Lennar, and KB Home in 2005 and 2006 in Maricopa County, Ariz., are five-year ARMs that will reset in 2010 and 2011. The report says many homeowners will be unable to refinance before the rates reset due to high loan amounts and falling home values. According to the report, home values in the area have declined an average of over $50,000 in the past year. "We need real and immediate action to help struggling homeowners, to bring the creation of good jobs back to the construction industry, to protect our retirement security from tainted investments, and to stabilize the mortgage and housing industry," said Terence M. O'Sullivan, LIUNA's general president. ".... Congress and regulators must scrutinize those who helped cause this crisis -- including corporate homebuilders -- and consider action to both defuse this ticking time bomb and prevent a recurrence." The construction union can be found online at http://www.liuna.org.

The National Association of Realtors is urging the Securities Industry and Financial Markets Association to reconsider its policies excluding Fannie Mae and Freddie Mac jumbo loans from "to-be-announced" pools so the two GSEs can obtain better pricing and securitize jumbo mortgages. Now that Congress has permanently raised the government-sponsored enterprise loan limits, "it is time to treat all GSE-eligible mortgages the same and permit pooling in TBA securities so all qualified borrowers may receive the full benefit of GSE mortgages," the NAR says in a letter to SIFMA. Fannie and Freddie mortgages at below the conforming loan limit (currently $417,000) are eligible for TBA pooling. But when Congress temporarily increased the maximum GSE loan limit to $729,750 as part of an economic stimulus package, SIFMA banned the higher-balance loans from TBA pooling. This exclusion has forced Fannie and Freddie to purchase and portfolio jumbo loans. With the GSEs trying to conserve capital, the NAR wants SIFMA to open the securitization spigot. The NAR can be found online at http://www.realtor.org, and SIFMA can be found at http://www.sifma.org.

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.