Servicing

Five classes of notes issued by Vertical ABS CDO 2006-1 Ltd./Corp., a collateralized debt obligation consisting largely of subprime mortgage-backed securities, have been downgraded and removed from Rating Watch Negative by Fitch Ratings. The downgrades were as follows: class A-S1VF, from BBB-plus to CCC; class A-1, from BBB to CC; class A-2, from BB-plus to CC; class A-3, from B-plus to C; and class B, from CCC to C. The downgrades were attributed to collateral deterioration involving subprime residential MBS, alternative-A RMBS, and structured finance CDOs with underlying exposure to subprime RMBS. Vertical 2006-1 is a hybrid cash flow and synthetic structured finance CDO.

Fannie Mae bought $63.8 billion worth of mortgages in June, a 7% decline from the previous month's level but flat compared with that of the same month a year ago. The government-sponsored enterprise, which will have a new, tougher regulator in a few months, saw its on-balance-sheet portfolio increase to $749.6 billion, a 4% gain compared with that of June 30, 2007. The annualized compounded rate of growth on the portfolio was 22.8%. Fannie had a total book of business (portfolio plus guarantees) of $3.039 trillion at month's end. The delinquency rate on its portfolio was 1.30%, compared with 0.62% 12 months earlier.

The Federal Reserve has authorized the Federal Reserve Bank of New York to extend through Jan. 30 its term securities lending facility, including the TSLF 2 that allows primary dealers to collateralize draws with certain mortgage-related securities. Collateral for the TSLF 2 includes mortgage-backed securities issued or guaranteed by federal agencies, federal agency debt securities, triple-A rated private-label residential MBS, commercial MBS, and asset-backed securities. The move is one of a series of steps the Fed has taken to provide a wider range of liquidity facilities. Some related actions have also been taken by the European Central Bank and the Swiss National Bank.

The Securities and Exchange Commission has extended its emergency order designed "to enhance protections against naked short selling in the securities of Fannie Mae, Freddie Mac and primary dealers at commercial and investment banks" until Aug. 12. The SEC said it would not extend the order beyond that date. "The order is designed to protect legitimate short-selling in these securities, but helps prevent illegitimate, naked short-selling and potential 'distort and short' manipulation," said SEC Chairman Christopher Cox. "In addition to continuing the existing order against naked short-selling, the commission will continue to explore other remedies for the broader marketplace to further protect investors from 'distort and short' artists." Under the emergency order "anyone effecting a short sale" in the securities specified must "arrange beforehand to borrow the securities and deliver them at settlement."

Hope Now servicers completed nearly 522,000 loan workouts in the second quarter, up 8% from the level recorded in the first quarter, as loan modifications jumped 30%. Loan modifications for subprime loans jumped from 122,100 in the first quarter to 164,200 in the second quarter, while loan-mods for prime mortgages rose from 48,100 to 55,100 over the same period. Meanwhile, 301,900 troubled borrowers ended up in repayment plans. Workouts involving loan modifications and repayment plans are "far greater than the actual foreclosures taking place in the market," Hope Now executive director Faith Schwartz told reporters. Servicers closely monitor loans that start the foreclosure process, and "we work aggressively to avoid those foreclosures," she said. Hope Now data show that sales of foreclosed properties have jumped dramatically since the fourth quarter and totaled nearly 245,700 in the second quarter. Sales of foreclosed properties resulting from subprime defaults totaled 138,000 in the second quarter, up 34% since the fourth quarter. Sales of foreclosed prime loan properties totaled 107,700, up 45% from the fourth-quarter level.

Twenty-seven classes of notes issued by five collateralized debt obligations linked to subprime residential mortgage-backed securities have been downgraded by Fitch Ratings. The affected securities include six classes from Jupiter High-Grade CDO II Ltd./Inc., a cash CDO; six classes of notes from ACA ABS 2003-1 Ltd. and six from ACA ABS 2003-2 Ltd., both cash flow structured finance CDOs; and five classes of notes from GSC ABS CDO 2005-1 Ltd. and four from GSC ABS CDO 2006-1c Ltd., both hybrid CDOs. The downgrades were attributed to "significant collateral deterioration" in the portfolios' subprime RMBS as well as (in the Jupiter and GSC ABS 2005-1 CDOs) structured finance CDOs with underlying exposure to subprime RMBS and (in the Jupiter CDO) alternative-A RMBS with underlying exposure to subprime RMBS. Fitch can be found online at http://www.fitchratings.com.

Fannie Mae purchased $18.2 billion in apartment loans during the first half, a 30% increase from the purchase volume in the same period of last year. The loans were originated by multifamily lenders that are part of its Delegated Underwriting and Servicing program. The government-sponsored enterprise adds liquidity to the market through its seller/servicers and by purchasing multifamily bonds. Its DUS program is celebrating its 20th anniversary this year. Fannie Mae can be found on the Web at http://www.fanniemae.com.

American Processing Co., Minneapolis, has agreed to purchase National Default Exchange, a provider of mortgage default processing services based in Addison, Texas, according to Dolan Media Co., which owns a majority of APC's stock. The terms of the agreement were not disclosed. Dolan said NDEx provides default processing services in Texas, California, and Georgia, three of the top 10 states in default-related activity, while APC offers similar services in Michigan, Indiana, and Minnesota. The closing of the acquisition is contingent upon several factors, including NDEx's entry into a long-term exclusive services agreement with Barrett Daffin Frappier Turner & Engel LLP, a Texas law firm. James P. Dolan, president and chief executive officer of Dolan Media, said the acquisition "will broaden our new market focus beyond acquisitions by providing us with the resources and knowledge to launch operations in new states." Dolan can be found on the Web at http://www.dolanmedia.com.

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."