Servicing

Citing recent rating actions on four financial guaranty insurance companies and their subsidiaries, Fitch Ratings has placed over 200 residential mortgage-backed securities insured by the companies on Rating Watch Negative.Fitch placed the AAA Insurer Financial Strength ratings of Security Capital Assurance Ltd., MBIA Inc., FGIC Corp., Ambac Assurance Corp., and their subsidiaries on Rating Watch Negative following updated assessments of the monoline insurance companies' exposure to RMBS, structured finance collateralized debt obligations backed by subprime mortgage collateral, and CDO-squared transactions. The affected RMBS classes include 19 insured by SCA, 87 insured by MBIA, 36 insured by FGIC, and 64 insured by Ambac. Fitch said the securities will remain on Rating Watch Negative while it conducts a review to determine which classes will be able to maintain their AAA ratings based on subordination, overcollateralization, or additional forms of credit enhancement that are not dependent on the guaranties. The rating agency can be found online at http://www.fitchratings.com.

Over 50% of the subprime 2/28 adjustable-rate mortgages in foreclosure in July were less than two years old and had not yet gone through an upward reset of the interest rate, according to a report sponsored by the Milken Institute.The report by James Barth and three other researchers at the Santa Monica, Calif.-based economic think tank indicates that 57% of 2/28 ARMs and 87% of 3/27 ARMs in foreclosure never went through a reset. And they argue that subprime mortgage foreclosures are going to be a problem because house prices are not rising and subprime borrowers are having trouble refinancing their loans. "Without home price increases, hybrid loans will surely exacerbate the foreclosure problem if interest rates reset upward, but they are not the basic cause of it," the report says. Mr. Barth is a senior fellow at the Milken Institute and Lowder Eminent Scholar in Finance at Auburn University.

Countrywide Financial Corp. and the Association of Community Organizations for Reform Now have entered into discussions to develop a "blueprint" for foreclosure prevention that they expect to release in early January."Countrywide and ACORN anticipate final release of the groundbreaking provisions of the home retention initiative soon after the New Year," says a joint release. The discussions are mainly focused on helping subprime borrowers who have shown an ability and willingness to make their payments. But the parties are also looking at different products, including payment-option adjustable-rate mortgages. "We see actually more borrowers getting into trouble with payment-option ARMs than we are seeing with hybrid ARMs at this point," said Michael Shea, executive director for ACORN Housing Corp. He noted that Countrywide does not have a systematic approach yet for helping option ARM borrowers. "That is one of the things we are talking to them about," Mr. Shea said. Countrywide, based in Calabasas, Calif., can be found online at http://www.countrywide.com, and ACORN can be found at http://acorn.org.

Distressed homeowners who used the equity in their homes to finance debt consolidation or vacations will still face a tax penalty if a lender reduces their mortgage debt under the recently enacted Mortgage Forgiveness Debt Relief Act.Only the forgiveness of mortgage debt used to finance the acquisition of a borrower's primary residence and improvements to the property will escape being treated as ordinary income for tax purposes, according to a mortgage banking alert by two tax attorneys at K&L Gates. Attorneys Kenneth Wear and Roger Wise also point out that only borrowers who have lived in their homes for at least two years can qualify for tax relief. This provision weeds out speculators but it also denies relief for new homeowners who got in over their heads and defaulted early. Meanwhile, the tax relief measure "places no additional burden on lenders," the tax attorneys say. The borrowers have to determine whether they qualify for relief. Lenders simply provide borrowers with Internal Revenue Service Form 1099-C (Cancellation of Debt).

Merrill Lynch & Co. -- which took $7.9 billion of writedowns on subprime and collateralized debt obligation assets in the third quarter -- may take an additional $10 billion in charges in the fourth quarter, according to a new research report issued by Sandler O'Neill.Sandler's estimate comes two days after Merrill sold a "passive" stake in itself to Temasek Holdings, a Singapore company, and Davis Selected Advisors, New York, for $6.2 billion. On Christmas Eve, Merrill sold most of its commercial finance operation to GE Capital for an undisclosed price. The sale, however, will free up about $1.3 billion in capital. The commercial unit is not involved in commercial mortgage lending. In its research report, Sandler called Merrill's equity sale a "necessary evil," noting that "we updated our expected CDO and subprime marks to $10 billion from $3.5 billion and estimated that [Merrill's] tangible equity ratio could fall to an uncomfortably low 2.2%."

Federal Realty Investment Trust, Rockville, Md., has announced the pricing of a public offering of 2 million common shares of beneficial interest at $81.21 per share.The joint book-running managers of the offering are Merrill Lynch & Co. and Wachovia Securities. Federal Realty, a real estate investment trust, can be found on the Web at http://www.federalrealty.com.

Fitch Ratings has assigned Greenpoint Mortgage Funding Inc., Novato, Calif., an SBPS3 primary servicer rating for small-balance commercial loans.Greenpoint was also assigned an SBSS3 special servicer rating for such loans. Fitch said the ratings are based on the company's "experienced management team and established technology and internal controls." Fitch rates small-balance commercial servicers on a scale of 1 to 5, with 1 being the highest rating.

Bank of America's residential primary servicer rating for home equity-related products has been upgraded from RPS1-minus to RPS1 by Fitch Ratings.The rating agency also affirmed at RPS1 BoA's residential primary servicer ratings for prime and alternative-A products. (Fitch rates residential servicers on a scale of 1 to 5, with 1 being the highest rating.) Fitch attributed the upgrade to "process improvements" in investor accounting, bankruptcy, and payoffs, and the completion of BoA's acquisition of the reverse mortgage business of the Seattle Mortgage Co. The rating agency also cited advancements in cash management and customer service.

Three hundred and eighty-eight classes of asset-backed securities supported by financial guaranty policies from Ambac Assurance Corp. have been placed on Rating Watch Negative by Fitch Ratings.Fitch said the actions followed its placement of Ambac Financial Group (the parent company of Ambac Assurance) on Rating Watch Negative. Also placed on Rating Watch Negative were the Insurer Financial Strength ratings of Ambac's financial guaranty insurance subsidiaries.

Fitch Ratings also issued a flurry of news releases Dec. 21 regarding various rating actions, including over 40 downgrades, on mortgage-backed securities from six issuers.Among the downgraded securities were 20 classes from Morgan Stanley subprime issues in 2002, 2003, and 2004; eight classes of Aegis mortgage pass-through certificates; and five classes of Structured Asset Investment Loan mortgage pass-throughs. The downgrades were attributed to deterioration in the relationship between credit enhancement and expected losses. Fitch can be found on the Web at http://www.fitchratings.com.