Servicing

Thirty-one classes from six Taberna collateralized debt obligations have been placed on Rating Watch Negative by Fitch Ratings. Four of the transactions -- Taberna Preferred Funding II, II, IV, and V -- are static CDOs, and the other two -- Taberna Preferred Funding VI and VII -- are managed CDOs. The transactions are supported by portfolios of trust preferred securities and subordinated debt issued by subsidiaries of real estate investment trusts, real estate operating companies, homebuilders, and specialty finance companies, as well as commercial mortgage-backed securities and, in some cases, senior debt securities or commercial real estate loans. Fitch attributed its rating actions to "heightened concern related to continued negative portfolio credit migration, as well as additional default activity." Fitch can be found on the Web at http://www.fitchratings.com.

Standard & Poor's Ratings Services is requesting comments on a proposal to incorporate credit stability as an important factor in its ratings. S&P said the purpose of the proposal is to more closely align the meanings of its ratings with its "perception of investors' desires and expectations" in the wake of the greater volatility recently displayed by certain derivative securities. "Under the proposal, when assigning and monitoring ratings, we would consider whether we believe an issuer or security has a high likelihood of experiencing unusually large adverse changes in credit quality under conditions of moderate stress," said Mark Adelson, managing director and chief credit officer at S&P. The rating agency said it expects the proposed change to have little, if any, effect on corporate and government ratings but a greater effect on certain areas of structured finance, especially derivatives. If adopted, the change would be implemented over a period of about six months, Mr. Adelson said. Responses are requested by Aug. 6. S&P can be found online at http://www.standardandpoors.com.

R&G Financial Corp., San Juan, Puerto Rico, has announced the receipt of notices from Freddie Mac terminating the eligibility of R&G Mortgage Corp. and R-G Premier Bank to sell mortgages to Freddie or to service mortgages for the government-sponsored enterprise. The holding company said it has obtained a temporary restraining order from U.S. district court against the terminations and will appeal the actions. It also reported that Freddie Mac's notice indicated that the terminations were based on concerns about the two R&G subsidiaries' ability to continue to act as a servicer and to meet their obligations to the GSE. As of June 30, Freddie Mac servicing amounted to approximately 42% of R&G Mortgage's servicing portfolio, R&G Financial said, adding that it estimates that an additional 25%-30% of the servicing portfolio could be affected due to contractual commitments related to Freddie Mac seller/servicer status.

The Federal Deposit Insurance Corp. has approved a policy statement that should facilitate the issuance of covered bonds this fall by a few large federally insured banks and thrifts. "Covered bonds can serve as an additional source of financing for mortgage lending, and thereby offer potential benefits for banks and homebuyers," FDIC Chairman Sheila Bair said. The final policy statement assures investors that they will have quick access to the mortgage collateral of covered bonds if an institution fails and goes into an FDIC receivership. However, proponents of covered bonds are disappointed that the FDIC is limiting covered-bond issuance to 4% of total liabilities, which not only restricts issuance but essentially locks midsize banks out of the covered-bond market. The chairman acknowledged that the FDIC wants to see how the market develops before raising the cap. Ms. Bair also served notice that the FDIC may issue guidance later this year that limits a bank's reliance on secured liabilities. Federal Home Loan Bank advances and covered bonds are considered secured liabilities. The failure of the $32 billion-asset IndyMac Bank is going to be very costly for the deposit insurance fund because the thrift had $10 billion in FHLBank advances. The FHLBank has first rights to the mortgage collateral that backs the advances.

Wells Fargo's second-quarter earnings fell $500 million short of last year's level, but investors cheered as the company's quarterly revenue rose to a new high and the board approved a 10% dividend increase. Wells earned $1.8 billion ($0.53 per share) in the second quarter, down from $2.3 billion ($0.67 per share) a year earlier. Results were weighed down by a $1.5 billion increase in the provision for future credit losses. Chargeoffs in the second quarter also totaled $1.5 billion, unchanged from the level recorded in the first quarter but double that of the first quarter of 2007. Chief credit officer Mike Loughlin said the increase in credit reserve reflects "expected higher losses" in Wells Fargo's home equity group and unsecured retail loans. Wells also reported higher losses from its first-lien mortgage portfolio, which Mr. Loughlin said was expected given the continued declines in home prices. Wells Fargo originated $31 billion of retail mortgages in the first quarter, little changed from the previous year's volume, and increased the size of its servicing portfolio to $1.55 trillion. Wells Fargo's stock price rose more than 20% in morning trading on Wednesday after the results were released.

Moody's has corrected a rating action affecting securities issued by First Franklin Mortgage Loan Trust on April 21, noting that 282 tranches from 30 transactions were downgraded rather than 286 as the ratings agency originally reported. "Certain specific features of the cash waterfall and loss allocation were not fully accounted for," Moody's said. The ratings agency said the collateral backing the residential mortgage-backed securities are first-lien, subprime adjustable-rate mortgage loans. "The ratings were downgraded, in general, based on higher than anticipated rates of delinquency, foreclosure, and REO in the underlying collateral relative to credit enhancement levels," Moody's said.

U.S. Bancorp's second quarter earnings fell 18.5% compared with the year-earlier period as the company added to its loss reserves. U.S. Bancorp's net income for the second quarter fell to $950 million, compared with $1.16 billion in the second quarter of last year. Blaming "continued stress in residential real estate," the Minneapolis-based lender increased its provision for credit losses to $596 million in the second quarter of 2008, which was $111 million higher than the first quarter provision and $405 million higher than in the second quarter of 2007. The company said that declines in home and other collateral values will probably continue to push up charge-offs in the third quarter.

Fitch recorded a higher U.S. commercial real estate loan collateralized debt obligation delinquency rate in June that it said stemmed from the maturity default of one participated loan secured by a hotel/condominium development in South Florida. The CREL CDO delinquency index increased to 1.58% during the month from 1.08% the previous month. This is much higher than Fitch's commercial mortgage-backed securities delinquency rate because "the assets securing the loans in a CREL CDO are transitional in nature or highly leveraged," the ratings agency said. "In addition, the CREL DI covers 25 transactions with 340 assets while the CMBS DI covers many more (500) transactions with significantly more (42,000) loans," Fitch said. "As a result, because of the smaller number of loans in the index, one loan can have a big impact on the delinquency percentage," the ratings agency said. The CREL CDO delinquency index includes loans that are 60 days or longer delinquent, matured balloon loans and repurchased assets.

Standard & Poor's Ratings Services has lowered its ratings on 118 classes from 13 residential mortgage-backed securities transactions backed by U.S. prime jumbo mortgage collateral issued in 2005 and 2006. "The downgrades reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses," S&P said. The ratings agency said it assumes a loss severity of 23% for U.S. prime jumbo RMBS transactions.

Servicers of subprime residential adjustable-rate mortgage loans are seeing an increase in efforts to modify troubled loans, according to Moody's Investors Service survey. "Moody's found servicers had modified, as of the end of March 2008, 9.8% of the subprime ARMs with interest rate resets in the preceding 15 months," the ratings agency said. "In December, a similar survey found only 3.5% of resetting loans being modified," said Moody's. The survey included information from 10 servicers with a total servicing volume of approximately $550 billion, according to the ratings agency. Moody's said these servicers represent roughly 50% of the total U.S. subprime servicing market.