Servicing

Class B-4 of Morgan Stanley's series 2005-3AR issue of residential mortgage-backed securities has been downgraded from BB to B by Fitch Ratings. Fitch also affirmed the ratings on 10 classes from three Morgan Stanley RMBS issues. The downgrade was attributed to deterioration in the relationship between credit enhancement and expected losses.

Servicers of commercial mortgage-backed securities are facing challenges in the current less-than-liquid environment, according to Fitch Ratings. The rating agency said servicers now face more inquiries from investors. Other challenges include increased bidding competition for fewer securitizations and the need to add more staff, redeploy staff, or create specialized groups to deal with new concerns. In the case of special servicers, they will not be able to easily get rid of real-estate-owned assets because of decreased liquidity and may end up taking more losses, Fitch said. "Although there is still capital in the real estate market, the profile of the buyers has changed, and individual real estate investors are less likely to be able to purchase property because their financing options are limited," said Stephanie Petosa, a Fitch managing director. Institutional investors and opportunistic funds are likely to be more active. One positive fallout from this environment is that fewer loans are defeasing or prepaying, which is good for the stability of master servicers' portfolios, Fitch said. The rating agency can be found online at http://www.fitchratings.com.

The Core Mortgage Risk Index increased 9.0% in the first quarter, reflecting the pressures of rising delinquency and foreclosure rates, flat or declining price appreciation, and slower job growth, according to First American CoreLogic, Sacramento, Calif. Among the largest 100 markets in the country, CoreLogic said the five with the highest risk are: Bakersfield, Calif.; Stockton, Calif.; Fresno, Calif.; Warren-Troy-Farmington Hills, Mich.; and Grand Rapids-Wyoming, Mich. "While Michigan markets overall are not as highly ranked as they were in the past, it is not because the risk has declined or even stabilized, but rather that California markets are deteriorating at a faster rate," the company reported. CoreLogic, a provider of mortgage risk assessment and fraud prevention systems, can be found on the Web at http://www.corelogic.com.

More than 2.2 million foreclosure filings were reported nationwide in 2007, up 75% from the level recorded in 2006, according to RealtyTrac, an online foreclosure marketplace based in Irvine, Calif. In December, 215,749 foreclosure filings were reported, up 97% from the total of a year earlier, the company said in its 2007 U.S. Foreclosure Market Report. (Foreclosure filings include default notices, auction sale notices, and bank repossessions.) "The year ended with a monthly increase of 7% in December, making it the fifth straight month with more than 200,000 foreclosure filings reported and giving the fourth quarter the highest quarterly total we've seen since we began issuing our report in January 2005," said James J. Saccacio, chief executive officer of RealtyTrac. RealtyTrac said Nevada, Florida, and Michigan recorded the highest foreclosure rates in 2007. The company can be found online at http://www.realtytrac.com.

Fannie Mae and Freddie Mac will be able to securitize jumbo mortgages originated between July 1, 2007, and the end of this year under the economic stimulus package that the House of Representatives was expected to pass Tuesday afternoon. The stimulus bill (H.R. 5140) temporarily raises the GSE conforming loan limit to 125% of median area home prices in high-cost areas, with a $729,750 cap. H.R. 5140 also includes "sense of Congress" language that encourages the government-sponsored enterprises to securitize the jumbo mortgages -- but leaves it up to Fannie and Freddie to decide the best execution. Fannie Mae president and chief executive Daniel Mudd told Bloomberg News that his preference is to securitize the loans. "That is a good business for us," he said. "It is not capital-intensive. But there may be instances where it makes sense to put them on the balance sheet." The stimulus bill also temporarily raises the loan limits for Federal Housing Administration loans in high-cost areas.

Bank of America chairman and chief executive Kenneth Lewis said the bank's planned acquisition of Countrywide Financial Corp. "is a go" after Countrywide released earnings Tuesday morning. Speaking at a Citigroup investors conference, Mr. Lewis said Countrywide's fourth-quarter financial results, which revealed higher credit costs and a loss, were in line with Bank of America's due diligence and offering price. "At this point, everything is a go for completing this transaction," Mr. Lewis said. He also said Countrywide's year-end results showed improvement in its underlying mortgage business. BoA can be found on the Web at http://www.bankofamerica.com.

Countrywide Financial Corp., Calabasas, Calif., has completely abandoned using commercial paper borrowings to fund its operations and is relying instead on hefty advances from the Federal Home Loan Bank System, according to its fourth-quarter earnings release. A year ago, Countrywide had $7.7 billion in outstanding asset-backed commercial paper and another $6.7 billion in unsecured CP, for a total of $14.4 billion. It now has zero in those categories, according to its earnings statement. At Dec. 31, 2007, it had $47 billion in outstanding advances from the FHLBank system, an increase of 69% in 12 months. The company can be found on the Web at http://www.countrywide.com.

After predicting that it would earn money in the fourth quarter, Countrywide Financial Corp. posted a $422 million loss for the period. Over the past six months, the nation's largest lender/servicer has lost $1.6 billion. It also reported fourth-quarter loan production of just $61 billion, a 48% decline from the level recorded a year earlier. The company originated just $65 million in subprime loans, compared with $9.1 billion a year ago. It set aside $924 million for credit losses in the fourth quarter, compared with $937 million in the third quarter. It also took an impairment charge of $831 million tied to what it called "retained interests" in prime-quality, junior-lien home equity securitizations. Countrywide's servicing business lost $198 million (pretax) in the fourth quarter, and the firm wrote down the value of its $1.46 trillion mortgage servicing portfolio by $1.6 billion. The publicly traded lender is slated for sale to Bank of America. In a statement, Countrywide chairman and chief executive Angelo Mozilo blamed the company's performance on "further credit deterioration across the industry and continued illiquidity in the secondary mortgage markets." For the year, Countrywide lost $704 million, its first annual net loss in more than 30 years.

The rating outlook of U.S. Central Federal Credit Union has been revised from stable to negative by Fitch Ratings because of the credit union's exposure to subprime mortgage-backed securities. "While losses to date have been absorbed through earnings, and management has taken steps to reduce its mortgage exposure, the portfolio still has meaningful exposure to the nonprime mortgage market and contains securities that could generate additional realized losses," Fitch said. The credit union's long- and short-term issuer default ratings have been affirmed at triple-A and F1-plus, respectively, as a result of its "solid credit fundamentals" and franchise strength, the rating agency said.

Huntington Bancshares, Columbus, Ohio, has been designated the "Bear of the Day" for Jan. 28 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. "Digestion of the Sky Financial merger has weighed on the share price in the current quarter, with the potential for negative implications over the next several quarters, as the Franklin relationship that was inherited with this acquisition mostly contributed to the loss," Zacks said. The research firm noted the weaknesses in the housing and credit environment and said they "are expected to overhang the market in 2008." Zacks can be found online at http://www.zacks.com, and Huntington can be found at http://www.huntington.com.