Servicing

JPMorgan Chase & Co. took losses on partially mortgage-related writedowns and the Bear Stearns merger during the second quarter, but it ultimately earned $2.0 billion and saw increases in mortgage banking income. The company took $1.1 billion in mortgage-related and leveraged lending writedowns and recorded a $540 million after-tax net loss on items related to the Bear Stearns merger during the period. JPMorgan Chase set aside a $1.3 billion provision for credit losses during the quarter, citing housing price declines that "have continued to result in significant increases in estimated losses, particularly for high loan-to-value home equity and mortgage loans." Mortgage banking net income was up 138% from that of a year earlier at $169 million due to gains in both production and net mortgage servicing revenues.

The triple-A long-term Issuer Default Ratings and senior debt ratings of Fannie Mae and Freddie Mac have been affirmed by Fitch Ratings, but Fannie's preferred stock rating has been downgraded and Freddie's has been placed on Rating Watch Negative. Fannie Mae's preferred stock rating was downgraded from AA-minus to A-plus and remains on Rating Watch Negative. Freddie Mac's preferred stock rating stands at A-plus. The affirmations of the government-sponsored enterprises' IDRs and senior debt ratings "reflect the high probability of external support" as well as the GSEs' "importance to the U.S. housing market," the rating agency said. The downgrade of Fannie's preferred stock "reflects the higher proportion of preferred stock to core capital" following the "recent erosion of core capital due to operating losses," Fitch said. The placement of Freddie's preferred stock rating on Rating Watch Negative "reflects the uncertainties surrounding the U.S. Treasury's plans, in general, and potential impact on preferred shareholders specifically, from any needed equity investment from the Treasury," the rating agency said. Fitch can be found online at http://www.fitchratings.com.

The sole classes of notes issued by seven Cloverie PLC collateralized debt obligations have been downgraded by Fitch Ratings and removed from Rating Watch Negative. The affected transactions -- all partially funded, static, synthetic CDOs -- are Cloverie PLC 2005-78, 2005-79, 2005-80, 2005-81, 2006-1, 2006-2, and 2006-3. The 2005 series have reference portfolios consisting primarily of subprime residential mortgage-backed securities, commercial MBS, and other structured finance assets. The 2006 series have reference portfolios consisting primarily of subprime RMBS, alternative-A RMBS, and other structured finance assets. The downgrades reflect "significant collateral deterioration" in the portfolios with regard to the subprime RMBS and, in the 2006 series, the alt-A RMBS, Fitch said.

Thirteen classes from three Attentus collateralized debt obligations have been placed on Rating Watch Negative by Fitch Ratings. The managed CDOs -- Attentus CDO I Ltd./LLC, Attentus CDO II Ltd./LLC, and Attentus CDO III Ltd./LLC -- 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 senior debt securities, commercial mortgage-backed securities and, in some cases, commercial real estate loans. Fitch attributed its rating actions to "heightened concern related to continued negative portfolio credit migration," as well as a collateral balance reduction stemming from one credit risk sale for Attentus CDO I and additional default activity for Attentus CDO II.

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.