Servicing

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.

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.