Servicing

Twenty-eight tranches from 12 transactions issued by IndyMac in 2007 have been downgraded by Moody's Investors Service, and 16 tranches have been placed on review for possible downgrade. The downgrades were based on higher-than-expected rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels. The collateral consists primarily of first-lien, fixed- and adjustable-rate alternative-A mortgage loans.

MBIA Insurance Corp., whose exposure to subprime mortgage collateral recently prompted Fitch Ratings to place its ratings on Rating Watch Negative, has priced $1 billion of 25-year surplus notes, according to its parent company, MBIA Inc., Armonk, N.Y. MBIA Insurance agreed to issue the notes as part of a plan to strengthen its capital. The notes will bear an initial interest rate of 14%, and after Jan. 15, 2013, the rate will be 11.26% above the three-month London interbank offered rate. The notes are callable at par at the company's option on the fifth anniversary of issuance and every fifth anniversary thereafter, MBIA said. The company can be found on the Web at http://www.mbia.com.

Provident Bankshares Corp., Baltimore, has announced that it will take a $28.9 million noncash after-tax charge to its fourth-quarter earnings in connection with a writedown of its REIT trust preferred securities. Provident said the real estate investment trust securities now have a fair market value of $18.6 million, compared with a carrying value of $66.0 million. "Our actions reflect the challenges that Provident and banks across the country are facing on two fronts," said Gary N. Geisel, Provident's chairman and chief executive officer. "First, on a national level, the lack of liquidity of certain bond investments that are tied to the residential housing market, and the resulting accounting adjustments that are required. And second, on a regional level, anticipating the impact of the continuing slowdown of the housing sector on our loan portfolio." The company can be found online at http://www.provbank.com.

Sovereign Bancorp Inc., Philadelphia, is taking a $1.4 billion noncash charge related to a goodwill impairment, of which $800 million is related to its June 2006 acquisition of Independence Community Bancorp, Brooklyn. In addition, Sovereign said it would take a charge of $180 million relating to $950 million in book value of Fannie Mae and Freddie Mac preferred stock. Its fourth-quarter loan loss provision will be $148 million, which exceeds fourth-quarter chargeoffs by $88 million. Finally, the company said it would take $27 million in charges related to financings it has provided to two mortgage companies that have defaulted on their agreements. Sovereign said it has exited some warehouse relationships while restructuring agreements with others and believes its remaining exposure is well contained and reserved against. Sovereign can be found online at http://www.sovereignbank.com.

Default rates on subprime mortgages will reach 22.17% by October, a 12-month increase of 14%, according to a new forecast made by Friedman Billings Ramsey. FBR sees alternative-A defaults rising to 6.67% in October, compared with 5.36% a year earlier. FBR says the higher default rate projections were spurred by a deteriorating labor market. On Friday, FBR threw its subprime unit, First NLC Financial Services, into bankruptcy. (See item above.) The lender is expected to be liquidated.

The ratings of Countrywide Financial Corp. have been placed on Rating Watch Positive by Fitch Ratings following the announcement of Countrywide's proposed acquisition by Bank of America Corp., while BoA's ratings have been affirmed and left with a negative rating outlook. Fitch said the transaction poses "significant challenges" to BoA, while enabling it to "achieve a key strategic goal" in the longer term. "The most significant challenge will be resolving credit issues related to CFC's stressed mortgage lending operations," the rating agency said. "While CFC has ceased nonprime lending activities, it retains a large volume of subprime, alt-A and high-value loan-to-value home equity loans on its books." Fitch can be found online at http://www.fitchratings.com.

Countrywide Financial Corp. chairman, chief executive, and founder Angelo Mozilo is entitled to a severance package of about $112 million if he leaves the company, according to a report put out by Equilar, an executive compensation company. Last week Bank of America agreed to buy the nation's largest lender and servicer for $4 billion. To date, no mention has been made about Mr. Mozilo's role with a Countrywide-owned BoA. His Countrywide employment contract stipulates that his reign as CEO will end in 2009, but he would remain as a nonexecutive chairman. If BoA decides not to keep him on as CEO, or he chooses to retire, his severance package would kick in. Basing its information on a year-old proxy statement, Equilar says Mr. Mozilo is entitled to a severance package of $88 million plus retirement benefits of $24 million. At deadline time, Countrywide could not be reached for comment. Over the past few yeas Mr. Mozilo has sold well over $300 million worth of Countrywide stock, converting options into cash. His stock sales are the subject of an investigation by the Securities and Exchange Commission. In past interviews he has maintained that all his stock sales were disclosed and done according to SEC rules.

The city of Cleveland has sued 21 lenders and Wall Street firms involved in the subprime mortgage market, seeking monetary damages under a "public nuisance law." The litigation is the latest in a series of municipal actions targeting lenders. The Cleveland lawsuit alleges that the lenders "financed and cultivated" the subprime market, leading to a foreclosure crisis that has proved costly for the city. Bank of America, Citigroup, Deutsche Bank, J.P. Morgan Chase, Merrill Lynch, Bear Stearns, Ameriquest, Washington Mutual, Countrywide Financial Corp., Morgan Stanley, Wells Fargo, Fremont General Corp., GMAC-RFC, Goldman Sachs, Greenwich Capital Markets, HSBC Holdings, IndyMac Bancorp, Lehman Brothers, NovaStar Financial, and Option One Mortgage were all named as defendants in the lawsuit.

Merrill Lynch & Co. may take additional writedowns of up to $15 billion on its collateralized debt obligations and subprime investments when it announces earnings this week, according to various analyst reports. Merrill, which is slated to announce earnings Jan. 17, would not comment on the reports. (In the third quarter, it took a $7.9 billion hit on CDOs and subprime assets.) According to a note put out by Sandler O'Neill, many "wild cards" exist for Merrill. "Estimating CDO/subprime writedowns is quite subjective given the range of marks we have seen from peers," said Sandler. "Our current estimate of $10 billion represents an estimated markdown to $0.40 on the dollar from [Merrill's] starting exposure levels. While this markdown is arguably quite aggressive, certain peers have been even more aggressive in putting these issues behind them. For example, we estimate that Morgan Stanley marked its exposure in the range of $0.25 on the dollar." Sandler said if Merrill takes a $15 billion charge in the fourth quarter, "this would represent a net writedown to approximately $0.22 on the dollar."

Merrill Lynch & Co. may take additional writedowns of up to $15 billion on its collateralized debt obligations and subprime investments when it announces earnings next week, according to various analyst reports. Merrill, which is slated to announce earnings Jan. 17, would not comment on the reports. (In the third quarter, it took a $7.9 billion hit on CDOs and subprime assets.) According to a note put out by Sandler O'Neill, many "wild cards" exist for Merrill. "Estimating CDO/subprime writedowns is quite subjective given the range of marks we have seen from peers," said Sandler. "Our current estimate of $10 billion represents an estimated markdown to $0.40 on the dollar from [Merrill's] starting exposure levels. While this markdown is arguably quite aggressive, certain peers have been even more aggressive in putting these issues behind them. For example, we estimate that Morgan Stanley marked its exposure in the range of $0.25 on the dollar." Sandler said if Merrill takes a $15 billion charge in the fourth quarter, "this would represent a net writedown to approximately $0.22 on the dollar."