Servicing

The issuer default rating, holding company ratings, and subsidiary debt ratings of American International Group Inc. have been placed on Rating Watch Negative by Fitch Ratings, partly as a result of what it calls AIG's "relatively large exposure" to turmoil in the U.S. mortgage market. Fitch said the actions followed an acknowledgement by New York-based AIG in a Feb. 11 filing with the Securities and Exchange Commission that its independent auditor believes the company had "a material weakness in internal controls" as of Dec. 31 related to the valuation of AIG Financial Products Corp.'s super-senior credit derivative portfolio. "Fitch believes the area of AIG most exposed to further deterioration in this market is the credit derivative portfolio within AIG FP, with its large net notional exposure of $505 billion at Sept. 30, 2007," the rating agency said. "Included in this total is $62.4 billion of collateralized debt obligations backed by structured finance collateral, mainly subprime U.S. residential mortgage-backed securities." Fitch can be found online at http://www.fitchratings.com.

Lenders and community activists aren't the only ones worried about an avalanche of foreclosures -- so are the nation's homebuilders, who fear that an abnormal jump in repossessions could force even further price cuts and delay the housing recovery. The National Association of Home Builders believes the market will hit bottom sometime this summer, and that its members will start building more and more houses in the third and fourth quarters. The NAHB's forecast is for single-family starts to fall to 600,000 annually in the second quarter, about half of what the business was producing in 2004. But it expects starts to inch up to 640,000 in the third quarter and 690,000 in the fourth quarter. Based on demographics alone, the NAHB says builders could be starting two million houses a year by 2011. But if a big chunk of the 1.4 million 2/28 loans that are due to reset this year go into foreclosure, all bets are off, NAHB economist Gopal Ahluwaliah told the group's annual convention in Orlando, Fla. "That's the wild card," he said. "If that happens, it will really slow down the recovery." The economist said that "if it wasn't for subprime, the [housing] market would have rebounded long ago."

Six of the nation's largest servicers -- which control nearly 60% of the $9 trillion residential receivables market -- have agreed to participate in a new Bush administration plan to freeze foreclosures for at least 30 days. Dubbed "Project Lifeline," the program affects both subprime and prime borrowers who are in danger of losing their homes. (The effort was actually created by the servicers, but with the blessing of the Treasury Department.) The servicers in charge of these delinquent loans -- including Countrywide Financial, Wells Fargo, Citigroup, and others -- will contact homeowners who are more than 90 days late, freeze the foreclosure process, and then try to work out a solution for the borrower. According to the Quarterly Data Report, the nationwide foreclosure rate on subprime loans is almost 8%.

Class 2B-1 of Irwin Home Equity Loan Trust mortgage pass-through certificates, series 2005-B group 2, has been downgraded from BB-plus to BB by Fitch Ratings. Fitch also affirmed the ratings on 21 classes from three Irwin transactions. The downgrade was attributed to deterioration in the relationship between credit enhancement and expected losses. The collateral consists primarily of subprime mortgage loans.

Eight classes of First Franklin 2006-FFA mortgage pass-through certificates have been downgraded by Fitch Ratings. The downgrades were as follows: class A1, from BBB-minus to CCC/DR2; class A2, from BBB-minus to CCC/DR2; class A3, from A-minus to CC; class A4, from BBB-minus to CCC/DR4; class M1, from BB to C/DR6; class M2, from BB-minus to C/DR6; class M3, from B-plus to C/DR6; and class M4, from B to C/DR6. Fitch said the downgrades were based on changes to its subprime loss forecasting assumptions that it says "better capture the deteriorating performance of pools from 2007, 2006, and late 2005 with regard to continued poor loan performance and home price weakness."

Eighty-seven classes of residential mortgage-backed securities guaranteed by MBIA have been placed on Rating Watch Negative by Fitch Ratings. Fitch recently placed MBIA's triple-A insurer financial strength rating on Rating Watch Negative after an announcement that Fitch will be updating certain modeling assumptions in its analysis of the financial guaranty industry. "With the possibility that modeled losses for structured finance collateralized debt obligations may increase materially as a result of these updated projections, Fitch believes that loss projections will be most sensitive to loss given default assumptions used for SF CDOs that reference subprime RMBS collateral," the rating agency said. Fitch can be found on the Web at http://www.fitchratings.com.

ACA Financial Guaranty Corp., a subsidiary of ACA Capital Holdings, has announced the signing of a letter of intent with FSI Capital to sell ACA's U.S. asset-backed securities and corporate credit CDO asset management business. The terms of the proposed deal were not disclosed. FSI Capital, through its affiliates and subsidiaries, manages 17 collateralized debt obligations totaling about $7.5 billion. ACA also announced its entry into a letter of intent with Resource Financial Fund Management Inc. to sell its U.S. collateralized loan obligation asset management business.

Countrywide Financial Corp., Calabasas, Calif., and a consumer advocacy group, the Association of Community Organizations for Reform Now, have reached a deal to help delinquent subprime borrowers retain their homes and avoid foreclosure. Countrywide and ACORN are formalizing workout programs for all types of subprime loans, not just hybrid adjustable-rate mortgages. The agreement also extends to borrowers in all stages of delinquency, reaching borrowers not covered by Countrywide's previous $16 billion home retention initiative or by the Hope Now alliance program. "Countrywide is eager to work with borrowers, whether they are facing rate resets or some other type of financial difficulty," said Michael Gross, managing director of loan administration for Countrywide. The company can be found online at http://www.countrywide.com.

A report from the Conference of State Bank Supervisors claims that seven out of ten seriously delinquent home mortgage borrowers "are not on track for any loss mitigation option." The CSBS's state foreclosure prevention working group, convened last summer by Iowa attorney general Tom Miller, has met with the nation's 20 largest servicers of subprime mortgage loans in an effort to increase communication between servicers and troubled borrowers. The task force found that servicers have increased their use of loan modifications and other home retention options. For those delinquent borrowers who are in communication with their servicer, almost half are working toward a loan modification, the CSBS said. In a conference call with reporters, Mr. Miller said servicers have been receptive to using "enlightened self-interest" to redouble efforts to pursue foreclosure alternatives and streamline the process of creating loan modifications. "Without a blink of an eye they signed onto this proposition."

HOPE NOW, an alliance created by mortgage lenders to aid troubled borrowers, says that approximately 869,000 mortgage borrowers were helped in the second half of 2007, an increase from the group's earlier estimate. "HOPE Now servicers are working hard to help more and more homeowners who are in difficulty, but we know there is much more to be done," said Faith Schwartz, executive director of HOPE NOW. 14 servicers, which manage more than 33 million home loans, or about 62% of the total servicing market, provided the data used for the estimate. In addition to 545,000 subprime borrowers who were helped with repayment plans or loan modifications, the organization says that 324,000 prime borrowers received assistance.