Servicing

Five classes of mortgage pass-through certificates issued by Merrill Lynch Mortgage Investors Merrill Lynch Credit Corp. have been downgraded by Fitch Ratings. The downgrades were as follows: series 2003-C, class B-4, from BBB-plus to BB, and class B-5, from BB-plus to CC/DR3; and series 2004-G, class B-3, from BBB to B, class B-4, from BB-plus to CC/DR4, and class B-5, from B-plus to C/DR6. Fitch also affirmed the ratings on seven other classes in the two deals. The downgrades were attributed to "current trends in the relationship between serious delinquency and credit enhancement." The collateral consists of adjustable-rate prime mortgage loans.

Six classes of notes from Sharps CDO I, a static cash flow collateralized debt obligations backed partly by alternative-A residential mortgage-backed securities, have been downgraded by Fitch Ratings. The downgrades were as follows: class A-1, from AAA to A-minus; class A-2, from AAA to A-minus; class B, from AA-plus to CC; class C, from A-plus to C; class D, from BBB to C; and class E, from BB to E. The downgraded classes were all removed from Rating Watch Negative. Fitch attributed the downgrades to "significant collateral deterioration" in the portfolio's alt-A RMBS. Approximately 63% of the portfolio has been downgraded since the transaction closed in December 2006, the rating agency said.

Twenty-four tranches from three alternative-A transactions issued by ChaseFlex have been downgraded by Moody's Investors Service. Twelve of the downgraded tranches remain on review for possible further downgrade, two tranches were placed on review for possible downgrade, and the rating on one tranche was confirmed. The collateral consists primarily of first-lien alt-A mortgage loans. The downgrades were based, in general, 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 rating agency can be found online at http://www.moodys.com.

Fifty additional classes of subprime mortgage-backed securities were downgraded by Fitch Ratings on May 2. Fitch also affirmed the ratings on classes with outstanding balances of more than $1.3 billion. The securities affected by the latest downgrades were: 22 classes from eight issues by Merrill Lynch Mortgage Investors; 15 classes from 10 issues by Asset Backed Funding Corp.; eight classes from three issues by Specialty Underwriting and Residential Finance; and five classes from four issues by Countrywide (CWABS).

Fifty-seven certificates from 11 transactions issued by Structured Asset Securities Corp. and backed by second-lien loans have been downgraded by Moody's Investors Service. Moody's also placed 19 classes of certificates on review for possible downgrade. The downgrades were attributed to the fact that credit enhancement levels, including excess spread and subordination, were too low in view of projected losses, Moody's said. "The actions take into account the continued and worsening performance of transactions backed by closed-end-second collateral," the rating agency said, adding that "substantial pool losses" in recent months have eroded the credit enhancement available to the mezzanine and senior certificates.

Fitch Ratings has downgraded 91 classes of notes from 17 collateralized debt obligations backed partly by subprime residential mortgage-backed securities. Among the affected securities are: 10 classes of notes issued by Duke Funding High Grade III Ltd.; eight classes issued by Monterey CDO Ltd./LLC; eight classes issued by Dalton CDO Ltd.; eight classes issued by Orient Point CDO Ltd.; seven classes issued by Kleros Preferred Funding II Ltd.; six classes issued by ABS CDO II Ltd./LLC; six classes issued by Bernoulli High Grade CDO I Ltd./Inc.; six classes issued by Broderick CDO 1 Ltd.; six classes issued by Ipswich Street CDO Ltd./LLC; six classes issued by Fort Sheridan ABS CDO Ltd.; five classes issued by Duke Funding X CDO Ltd./Corp.; four classes issued by C-BASS CBO XIV Ltd.; three classes issued by Benazzi CDO 2005-1 Ltd.; three classes issued by TORO ABS CDO I Ltd.; one class issued by Salisbury International Investments Ltd.; and one class issued by Marathon Structured Funding I LLC. Fitch attributed the downgrades to "significant collateral deterioration" in the portfolios' subprime RMBS and, in most cases, alternative-A RMBS and structured finance CDOs with underlying exposure to subprime RMBS. the rating agency can be found online at http://www.fitchratings.com.

Interactive Mortgage Advisors, Denver, is brokering the auction of servicing rights on a $14.3 billion bulk portfolio of Ginnie Mae home loans. Prospective buyers are asked to prepare two bids, one that includes a "buyout" of eligible loans and a bid for the servicing portfolio that excludes the "buyout" option. The average loan size totals $116,228. The weighted average interest rate is 6.267%, and the weighted average servicing fee is 0.406%. Delinquencies represent 8.01% of the loans, and 1.71% are in foreclosure or bankruptcy. Bids are due at noon Mountain Daylight Time on May 19.

Fitch Ratings and Standard & Poor's Ratings Services downgraded the ratings of Residential Capital LLC, Minneapolis, following ResCap's announcement of an exchange offer for approximately $14 billion of unsecured bonds. Fitch downgraded the company's issuer default rating from BB-minus to C and its senior debt from B-plus to C, while S&P downgraded ResCap's long-term corporate credit rating from CCC-plus to CC. Both rating agencies said they were likely to lower their ratings further, to default status, upon the execution of the exchange offer. "ResCap's announced debt exchange offer is part of a plan to address the company's capital structure in light of current and expected future market conditions, by lengthening debt maturities and providing security to first-lien creditors," Fitch said. ".... At the completion of the exchange, Fitch would assign a post-default IDR and new issue-level ratings solely reflecting a prospective view of ResCap and its new capital structure." The rating agency said it "envisions" that the new IDR would fall in the single-B category. S&P said a successful exchange by ResCap "would extend debt maturities, providing needed relief, but the action illustrates the gravity of the company's financial position."

Fannie Mae and Freddie Mac are defending their need for higher prices on riskier products, maintaining at the Mortgage Bankers Association's Secondary Market Conference in Boston that the first requirement under their charters is to provide liquidity to the market. "Our goal is to fulfill our mission of providing liquidity," said Thomas Lund, Fannie Mae's executive vice president for single-family mortgage business. "We need to align our prices to the risk we take in the marketplace to make sure we will be a liquid secondary-market provider." Patricia Cook, Freddie Mac's executive vice president and chief business officer, said her company is "approaching pricing in a risk-managed way" because the method used to price mortgages in the past is now passé. "Average pricing worked" in a narrow market, she explained. But with a wide array of products and underwriting requirements, it works "less effectively." Ms. Cook told the conference that Freddie Mac has struggled with a high default rate and declining profitability, so it had no choice but to re-evaluate its pricing. "We know you're hurting, but so are we," she said. The GSEs can be found online at http://www.fanniemae.com and http://www.freddiemac.com.

A Federal Housing Administration bill approved by the House Financial Services Committee last week will fall far short of its goal of helping 1 million at-risk borrowers avoid foreclosure, according to budget analysts. The Congressional Budget Office estimates that the FHA refinancing bill (H.R. 5830) would refinance only 500,000 homeowners into FHA loans during the life of the four-year program, when 2.8 million borrowers are expected to face foreclosure proceedings. The budget analysts note that the bill requires holders of first liens to write down loans to about 85% of the current appraised value, and they would have "an incentive to direct their highest-risk loan into the program." Other liens must be extinguished, which leaves little incentive for second lienholders to participate, unless a foreclosure sale is imminent. About 40% of subprime and alternative-A mortgages have second liens. "CBO estimates about 25% of the loans with second liens could be refinanced under this new program," the agency said.