Servicing

Freddie Mac has been designated the "Bear of the Day" for July 21 by Zacks Equity Research, Chicago. The Bear of the Day is a stock expected to underperform the markets over the next three to six months. "As the housing situation continues to worsen, we anticipate higher losses and writeoffs in the coming quarters," Zacks said. The research firm said Freddie will need to raise more capital, "which is becoming increasingly difficult and expensive," and predicted that the government-sponsored enterprise will suspend or cut its dividend. "Recent measures announced by the Treasury affirm our belief that both the GSEs [Freddie Mac and Fannie Mae] are too big and important to fail, but any investment by the Treasury will further dilute the existing shareholders," Zacks said, adding that it is maintaining its Sell recommendation on Freddie's shares and reducing its six-month target price to $4.50 per share. Zacks can be found online at http://www.zacks.com, and Freddie Mac can be found at http://www.freddiemac.com.

Freddie Mac has reaffirmed its commitment to raise $5.5 billion in new capital, and the publicly traded company said it has finally become a Securities and Exchange Commission registrant. "Becoming an SEC registrant marks an important milestone for the company and demonstrates our commitment to enhanced transparency and financial reporting," Freddie Mac chairman and chief executive Richard Syron said. The government-sponsored enterprise was expected to register its stock in 2003, but a $5 billion accounting scandal forced Freddie to concentrate on repairing its accounting systems and internal controls. Back in May, Freddie and Fannie Mae pledged to issue stock to raise additional capital. Fannie has issued $7.4 billion in common and preferred stock, but so far Freddie has not followed through. In the past two weeks, both GSEs have seen the value of their stock plummet. And the Federal Reserve Board granted Fannie and Freddie access to its lending window to head off any short-term funding problems. Freddie Mac has not set a date for its offering of common and preferred stock. The company said the date will depend on a "variety of factors, including prevailing market conditions."

Bank of America confirmed Monday that it is committed to maintaining the wholesale and correspondent platforms of Countrywide Financial Corp., which it purchased on July 1. According to the Quarterly Data Report, the Calabasas, Calif.-based Countrywide was the nation's largest correspondent lender and second-largest wholesaler in the first quarter, with production volumes of $31 billion and $9 billion, respectively. In a presentation released along with its second-quarter earnings, the Charlotte, N.C.-based BoA noted that the Countrywide mortgage franchise would discontinue the origination of certain types of nonconforming loans, including payment-option adjustable-rate mortgages. It reported that Countrywide will "significantly curtail" its use of low-documentation loans. Countrywide is no longer funding subprime loans of any type. In the first quarter, Countrywide's subprime servicing portfolio had a delinquency rate of 33%.

Despite taking numerous hits related to real estate lending, Bank of America beat Wall Street earnings estimates for the second quarter. The Charlotte, N.C.-based BoA earned $3.41 billion ($0.72 per share), down 44% from the level recorded a year earlier. The company recorded $3.62 billion of net chargeoffs and added $2.21 billion to its allowance for loan losses, saying most of the additional credit costs are "directly tied to housing," including home equity, residential mortgage, and homebuilder loans. Reporting Countrywide Financial Corp. results separately, Bank of America said the recently acquired company had a $2.33 billion net loss in the second quarter, including $4 billion in credit-related losses. The company can be found on the Web at http://www.bankofamerica.com.

Eight classes of notes issued by Abacus 2005-CB1 Ltd., a synthetic collateralized debt obligation based primarily on subprime residential mortgage-backed securities, have been downgraded and removed from Rating Watch Negative by Fitch Ratings. The downgrades were as follows: class A-1, from A-minus to CCC; class A-2, from BBB-plus to CCC; class B, from BBB to CC; class C, from BBB-minus to CC; class D, from BBB-minus to CC; class E-1, from BB-plus to CC; class E-2, from BB to CC; and class F, from BB-minus to CC. The downgrades were attributed to "significant" collateral deterioration of subprime RMBS in the portfolio. Fitch said the synthetic CDO was created to enter into credit default swaps with Goldman Sachs Capital Markets. The rating agency can be found on the Web at http://www.fitchratings.com.

Moody's Investors Service has downgraded the ratings of 40 tranches from 10 alternative-A transactions issued by Countrywide in 2006. In addition, the ratings on 18 senior tranches of CWALT Inc. mortgage pass-through certificates were confirmed. 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, alt-A mortgage loans. The rating agency can be found on the Web at http://www.moodys.com.

Citigroup Inc., New York, took $6.67 billion in largely mortgage-related writedowns in the second quarter and has reported a net loss of $2.5 billion that it said marked a relative improvement given that it was half the size of the first-quarter loss. The company said $3.4 billion of its writedowns stemmed from subprime-related direct exposures, $2.4 billion was related to exposure to monoline insurers, $545 million was linked to commercial real estate positions, and $325 million was tied to alternative-A credit mortgages, net of hedges. "The cost of credit increased by 20% from the first quarter, but writedowns in our securities and banking business dropped by 42%," said Vikram Pandit, Citi's chief executive officer. "Additionally, headcount and expenses declined sequentially. While there is still much to do, we are encouraged by our progress in delivering on our commitment to the re-engineering efforts." Citigroup can be found on the Web at http://www.citigroup.com.

Merrill Lynch has reported a $4.7 billion net loss in the second quarter and saw more than $9 billion in writedowns and losses that were partly mortgage-related, but says it is making progress in reducing its problem assets and bolstering its liquidity. Writedowns and losses during the quarter included $3.5 billion related to U.S. super-senior asset-backed security collateralized debt obligations, as well as credit valuation adjustments of negative $2.9 billion related to hedges with financial guarantors, about half of which were linked to U.S. super-senior ABS CDOs. Other losses and writedowns included $1.3 billion from "certain residential mortgage exposures" and $1.7 billion from the investment portfolio of Merrill's U.S. banks. "Our core franchise continues to perform well despite the extremely challenging market environment," said John A. Thain, chairman and chief executive officer. "Against this backdrop, we increased our excess liquidity pool to a record level of $92 billion and significantly reduced our exposures in key asset classes." Merrill can be found online at http://www.ml.com.

Keefe, Bruyette & Woods Inc., New York, has announced that First American Corp. will replace IndyMac Bancorp in the KBW Mortgage Finance Index as of July 18. The move follows IndyMac's recent seizure by the Federal Deposit Insurance Corp. KBW, an investment bank, can be found on the Web at http://www.kbw.com.

The American Securitization Forum has launched ASF Project Restart, an industry-developed initiative to help rebuild investor confidence in mortgage- and asset-backed securities, restore capital flows to the securitization markets, and increase the availability of affordable credit to borrowers The first phase of the project is a proposed ASF RMBS Disclosure Package that standardizes and expands issuer disclosure to investors and credit rating agencies, particularly on mortgage loan-level information. It is geared toward producing uniform data that are reliable, understandable, consistent, and equally available to all market participants. ASF says the package will enable investors to more easily compare loans and transactions across issuers and perform loan-level analysis to evaluate residential MBS transactions based on the features and performance of the underlying mortgage loans. The loan-level detail will aid rating agency evaluations by enhancing the quality, consistency, and comparability of information relating to securitized assets. Comments on the proposal are due by Aug. 22. ASF said it expects to issue a final version before year's end for implementation in 2009.