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U.S. home prices were down nationally by a record 15.8% in May from the level recorded a year earlier, according to the S&P/Case-Shiller home price index. For the second month in a row, all 20 of the metropolitan areas tracked by the Case-Shiller index are showing home price declines on an annualized basis. In 10 of the 20 metropolitan areas, prices have registered double-digit declines. Las Vegas and Miami continued to have the most severe home price deterioration -- 28.4% and 28.3%, respectively -- over the previous 12 months, with Phoenix, Los Angeles, San Diego, San Francisco, and Tampa, Fla., all recording declines of more than 20%, according to the report. "The overall real estate market continued to slide in May, with the 10-city and 20-city composites declining by 1.0% and 0.9% for the month, respectively," said David Blitzer, chairman of the index committee at Standard & Poor's. "Since August 2006, there has not been one month where we have seen overall price increases, as measured by the two composites." S&P can be found on the Web at http://www.standardandpoors.com.

Hoping to revive the private-label mortgage-backed securities market, the Treasury Department on Monday issued a best- practices guide aimed at underwriters that are interested in issuing "covered bonds" backed by nonconforming loans. "The private-label market is severely constrained," said Treasury Secretary Henry Paulson at a news conference. "Fannie Mae and Freddie Mac are funding more than 70% of all mortgages today." A covered bond is a debt instrument backed by a specific pool of mortgages. The underlying collateral is held on the balance sheet of the institution issuing the security. Mr. Paulson called covered bonds a "new funding source" for nonagency loans and said he is hoping the Treasury's guidance will create "greater risk awareness and investor discipline." He said his agency is looking to support the nascent market for covered (housing) bonds, and noted that four major banks -- Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo -- are creating covered-bond programs for mortgages [see item below]. Capital Research and Management of Los Angeles, an investment adviser, said, "We expect the covered-bond initiative will provide an important new source of long-term funding in the mortgage market. We also believe that the Treasury Department's best-practices guide, especially its requirement for high-quality collateral, will provide the structure needed for the covered-bond market to develop over time."

Merrill Lynch has planned a series of moves to improve its capital position, including the sale of problematic mortgage-related collateralized debt obligations (with a gross notional value of $30.6 billion) for $6.7 billion. An affiliate of private equity firm Lone Star, which has held investments in two surviving subprime firms, has agreed to buy the super-senior asset-backed security CDOs involved in the sale. Merrill said the ABS CDOs were carried at $11.1 billion at the end of the second quarter. The company said it expects to take a third-quarter pretax writedown of about $4.4 billion as a result of the deal, which chairman John Thain said is a "significant milestone" in Merrill's risk reduction efforts. Other moves the firm is making to improve its capital position include the termination of ABS CDO hedges with a monoline guarantor and settlement negotiations with other monoline counterparties that are expected to result in a maximum loss of $1.3 billion. The Wall Street firm is also issuing new common shares with gross proceeds of approximately $8.5 billion through a public offering in which Singapore investment house Temasek Holdings has agreed to purchase about $3.4 billion in common stock. Merrill Lynch can be found online at http://www.ml.com.

Seven classes of notes issued by Tallships Funding Ltd., a collateralized debt obligation composed largely of subprime residential mortgage-backed securities, have been downgraded by Fitch Ratings. The downgrades were as follows: advance swap, from BBB to CCC; revolver, from BBB to CCC; class A-1, from B-plus to CC; class A-2, from B-minus to CC; class B, from CCC to C; class C, from CC to C; and class D, from CC to C. Fitch attributed the downgrades to "significant collateral deterioration within the portfolio, specifically subprime RMBS. Since the last review conducted in November 2007, approximately 84.2% of the portfolio has been downgraded." Tallships Funding is an arbitrage hybrid synthetic and cash CDO that includes an unfunded super senior liquidity facility consisting of an advance swap and a revolving credit agreement.

Four tranches from two payment-option adjustable-rate mortgage transactions backed by loans originated by Downey Savings and Loan Association have been downgraded by Moody's Investors Service. The downgrades were as follows: DSLA Mortgage Loan Trust 2005-AR2, class 2-A2, from Aaa to Aa3, and class 2-A1B, from Aaa to Aa3; and DSLA Mortgage Loan Trust 2005-AR3, class 2-A2, from Aaa to A2, and class 2-A1C, from Aaa to A2. In addition, 10 senior tranches from four transactions were confirmed at Aaa. The downgrades, in general, were based on higher-than-expected rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels, Moody's said. The collateral consists primarily of first-lien, adjustable-rate, negatively amortizing alternative-A mortgage loans. Moody's can be found online at http://www.moodys.com.

Nine classes of Crystal River CDO 2005-1 Ltd., a collateralized debt obligation backed partly by subprime residential mortgage-backed securities, have been downgraded by Fitch Ratings. Eight of the nine classes were removed from Rating Watch Negative. Fitch attributed the downgrades to "significant collateral deterioration" in the portfolio, specifically regarding subprime RMBS and structured finance CDOs with underlying exposure to subprime RMBS. "Since the last review conducted in November 2007, approximately 48.8% of the portfolio has been downgraded," Fitch said, adding that 95.9% is rated below investment grade. The rating agency can be found online at http://www.fitchratings.com.

The Senate voted 72-13 on Saturday to pass a landmark housing bill that will provide up to $300 billion in new FHA money for distressed homebuyers and create a new, tougher regulator for Fannie Mae, Freddie Mac, and the other housing GSEs. President Bush is expected to sign the bill by midweek. The House passed the bill last week. Among other things, the "Housing and Economic Recovery Act of 2008" permanently raises the Fannie/Freddie loan limit to $625,000 and bans downpayment assistance programs in regard to Federal Housing Administration loans. It also allows for the Treasury Department to invest in Fannie/Freddie securities, if need be. "For Americans out there today with distressed mortgages and worried about their economic future, we hope this legislation could be the first piece of good news in a long time," Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., told reporters over the weekend.

Four classes of notes issued by C-BASS CBO XVII Ltd., a collateralized debt obligation consisting largely of subprime and alternative-A residential mortgage-backed securities, have been downgraded and removed from Rating Watch Negative by Fitch Ratings. The downgrades were as follows: class A, from BBB to CCC; class B, from BBB-minus to CC; class C, from BB to C; and class D, from B-plus to C. The downgrades were attributed to "significant collateral deterioration" in the portfolio, especially regarding the subprime and alt-A RMBS. Fitch can be found online at http://www.fitchratings.com.

In the second quarter, 66% of the homeowners who refinanced their homes got a mortgage at least 5% larger than the original loan, up from a revised 58% in the previous quarter but down from 84% a year earlier, according to Freddie Mac. In the first half, 9% of refinancing homeowners actually reduced their loan amounts, the government-sponsored enterprise said in its quarterly refinance review. "This is the largest cash-in share since the summer of 2005," said Frank Nothaft, Freddie Mac's chief economist. "This may reflect more cautious underwriting by lenders, resulting in homeowners' paying down their loan balance in order to receive more favorable loan rates and terms."

Freddie Mac bought $53.6 billion in mortgages during June, a 21% decline from the level recorded in May, but an increase from that of a year earlier. The company also reported that its delinquencies rose to 0.86% of all loans, a slight increase from the previous month. A year ago Freddie Mac had a delinquency rate of 0.42%. Its retained portfolio totaled $791.8 billion at the end of June, an 11% increase from that of a year earlier. In trading Friday, Freddie's stock fell slightly, to $8.19. Legislation that just passed the House allows the Treasury Department to invest in Freddie Mac and Fannie Mae securities, if need be. Freddie can be found on the Web at http://www.freddiemac.com.