Servicing

UBS took a net loss equal to about $11.28 billion for the fourth quarter due to almost $14 billion of residential mortgage-related writedowns that largely matched an earlier earnings estimate by the company. "While most of our businesses continued to be very profitable, the sudden and serious deterioration in the U.S. housing market, in combination with our large exposure in subprime mortgage-related securities and derivatives, has driven us into loss," said Marcel Rohner, UBS chief executive officer. The company's residential mortgage-related losses consisted of $10.8 billion related to U.S. subprime loans, $2.0 billion related to U.S. alternative-A loans, and $871 million related to bond insurer credit protection on U.S. residential mortgage-backed security collateralized debt obligations.

Twenty-five classes from six subprime issues of Merrill Lynch Mortgage Investors mortgage pass-through certificates have been downgraded by Fitch Ratings. Fitch also affirmed the ratings on eight classes from the six transactions. The downgrades were attributed to deterioration in the relationship between credit enhancement and loss expectations.

Sixty-two classes from 11 subprime issues of SACO mortgage pass-through certificates have been downgraded by Fitch Ratings. Fitch also affirmed the ratings on 33 classes from the SACO transactions. The downgrades were attributed to deterioration in the relationship between credit enhancement and loss expectations.

Moody's Investors Service has downgraded the servicer quality rating of First Tennessee Bank NA as a primary servicer of second-lien loans from SQ2-plus to SQ2 and removed it from review for possible downgrade. Moody's said the downgrade was prompted by "the high level of volatility" in the U.S. residential mortgage market, as well as the rating agency's downgrade of the long-term, senior unsecured debt rating of First Tennessee's ultimate parent, First Horizon National Corp., from A3 to Baa1 and of First Tennessee Bank's long-term deposits from A2 to A3. Both ratings have been assigned a negative outlook.

Moody's Investors Service has downgraded the servicer quality rating of First Horizon Home Loans as a primary servicer of prime loans from SQ2-plus to SQ2 and removed it from review for possible downgrade. In addition, at the company's request, Moody's has withdrawn First Horizon's rating as a primary servicer of second-lien mortgage loans. Moody's said the downgrade was prompted by "the high level of volatility" in the U.S. residential mortgage market, as well as the rating agency's downgrade of the long-term, senior unsecured debt rating of First Horizon's parent, First Horizon National Corp., from A3 to Baa1 with a negative outlook. Moody's can be found on the Web at http://www.moodys.com.

RealtyTrac, an online foreclosure marketplace based in Irvine, Calif., has reported that the three highest foreclosure rates among the nation's 100 largest metropolitan areas last year were recorded in Detroit; Stockton, Calif.; and Las Vegas. The company's Year-End 2007 Metropolitan Foreclosure Market Report is based on the company's database of pre-foreclosure and foreclosure properties, which it says includes more than 1 million properties in nearly 2,500 counties across the country. "As expected, the number of properties entering some stage of foreclosure in 2007 was up in the vast majority of the nation's 100 largest metro areas, with 86 metros reporting increases from 2006," said James J. Saccacio, RealtyTrac's chief executive officer. "Most of the metro areas with the highest foreclosure rates were either cities like Stockton and Las Vegas, which experienced meteoric growth and unsustainable price appreciation over the past few years, or cities like Detroit, which are undergoing a more widespread economic downturn along with higher unemployment rates." The company said 15 of the metro areas with the 20 highest foreclosure rates were located in four states: California, with six; Ohio, with four; Florida, with three; and Michigan, with two. RealtyTrac can be found online at http://www.realtytrac.com.

Certain directors of Bank of America and Washington Mutual may face an election challenge if they do not provide a satisfactory explanation of what they did "to protect shareholders from excessive mortgage-related risk" in the past two years, according to CtW Investment Group. CtW called for the explanations, and threatened to urge shareholders to vote against the directors, in letters to BoA's Jackie M. Ward, Frank P. Bramble Sr., and Robert L. Tillman and WaMu's Mary Pugh, Stephen E. Frank, and William G. Reed Jr. The six directors sit on the BoA and WaMu committees designated to oversee risk for their respective banks, CtW said. "The meltdown of the U.S. mortgage market is among the worst financial disasters of the past 50 years," said Bill Patterson, executive director of CtW. "At the epicenter of this crisis are Bank of America, Washington Mutual, and four other U.S. banks whose failure to manage mortgage-related risk not only destroyed almost $300 billion in combined shareholder value, but also helped destabilize the global capital markets and precipitate a credit crunch that now threatens to throw the U.S. economy into recession." CtW can be found online at http://www.ctwinvestmentgroup.com.

Homebuilders are working through a second wave of sales cancellations, according to an industry management consultant who says most builders are "shell-shocked" and entering the year with no backlog of sales. "That is a bad omen for 2008," said Charles Shinn, president of the Shinn Group. The first wave started in 2005 when speculators started walking away from their deals, and there was a huge number of cancellations in 2006. The second wave started with the subprime meltdown last summer when lenders tightened lending standards and prequalified buyers couldn't close because lenders had changed the rules. The Littleton, Colo., consultant estimates that sales cancellations during the two waves total 250,000. "Builders seem to be feeling the worst is over," Mr. Shinn said, but they are "wondering when this thing is going to turn around." However, the banks have their problems, lending standards are tight, and inventories of unsold homes are already high and feeding on foreclosures. "I don't think the market is back yet," said the consultant, who lists 500 builder clients. He is also concerned that the economy may have entered a recession in December, which could delay a housing recovery until 2009 or even 2010.

Morgan Stanley has announced that it will scale back its residential mortgage operations in the United States and shut down Advantage Home Loans, its U.K.-based residential mortgage lending business. The company cited the continued deterioration of the mortgage markets as the reason for the moves, which it said will affect about 1,000 employees in the United States and the United Kingdom. Morgan said it will continue to service mortgage loans in the United States through Saxon Mortgage Services Inc., Fort Worth, Texas, and continue to offer residential mortgages to retail brokerage clients through Morgan Stanley Credit Corp. "Given the continued dislocation in the mortgage markets, we have restructured our residential mortgage business to ensure we are appropriately positioned for the environment going forward," said Anthony Meola, chief operating officer of Morgan Stanley's U.S. residential business. The company can be found online at http://www.morganstanley.com.

Standard & Poor's Ratings Services has lowered its ratings on 67 tranches (totaling $7.65 billion) from 10 U.S. cash flow and hybrid collateralized debt obligation transactions. S&P said nine of the affected transactions are mezzanine structured finance CDOs of asset-backed securities, which are collateralized in large part by mezzanine tranches of residential mortgage-backed securities and other structured finance securities. The other is a "high-grade" structured finance CDO of ABS, which the rating agency defines as one backed at origination predominantly by triple-A and double-A rated tranches of RMBS and other structured finance assets. The downgrades reflect various factors, including credit deterioration, recent negative rating actions on subprime RMBS securities, and changes to the recovery rate and correlation assumptions S&P uses to assess RMBS held within CDO collateral pools. S&P can be found on the Web at http://www.standardandpoors.com.