Servicing

Continued "challenging" mortgage-related credit market conditions have caused Merrill Lynch to make "fair value adjustments" to exposed securities and businesses that it says will affect its third-quarter results.Merrill disclosed the concern in a Sept. 14 Securities and Exchange Commission filing, which it says it made "in anticipation of the closing" of its acquisition of First Republic Bank, set for Sept. 21. The company also reiterated past statements in which it noted that it is a "major player" in the areas exposed to the risk, namely the "subprime mortgage market, including certain collateralized debt obligations (CDOs), as well as other structured credit products and components of the leveraged finance origination market." Merrill Lynch can be found online at http://www.merrilllynch.com.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., has scheduled a mark-up of a Federal Housing Administration reform bill on Sept. 19, and the House is expected to vote on passage of an FHA bill this week.The FHA reform bill "can be an important component in addressing the tidal wave of foreclosures" and provide troubled homeowners with "safe, affordable home loans," Sen. Dodd said. When the House takes up the FHA bill (H.R. 1852), Financial Services Committee Chairman Barney Frank, D-Mass., will offer a manager's amendment that specifically authorizes the FHA to refinance homeowners who are in default and have mortgages with "adverse terms or rates." Rep. Frank also plans to offer an amendment that boosts FHA loan limits to 125% of the median house price or $730,000 (175% of the conforming loan limit), whichever is lower. The Senate FHA reform bill is expected to raise the FHA loan limit to the $417,000 conforming loan limit in high-cost areas.

PHH Corp. -- which controls the nation's 11th-largest residential servicer -- says its sale to General Electric is in doubt because investment bankers arranging the acquisition believe there will be a significant shortfall in the amount of debt financing needed.In a statement, the Mt. Laurel, N.J.-based PHH said it was informed by J.P. Morgan and Lehman Brothers that there could be a $750 million "shortfall" in debt financing. In March, General Electric Capital Corp. agreed to buy PHH in its entirety for $1.9 billion. GECC then planned to flip PHH's mortgage business (the company's biggest asset) to The Blackstone Group. Blackstone arranged to buy PHH Mortgage through a limited liability corporation called Pearl Mortgage Acquisition. In a letter sent to PHH by Pearl, Pearl said it is looking at alternative financing but is not optimistic that the sale will be completed. On Monday afternoon, PHH's shares traded down 17% to $23.74, reaching a new 52-week low. Its high is $31.52.

Eighteen additional classes of subprime mortgage- and asset-backed securities have been downgraded by Fitch Ratings as a result of changes to its subprime loss forecasting assumptions.Fitch also affirmed the ratings on classes with outstanding balances of nearly $1.7 billion. The securities affected by the latest downgrades were: 12 classes from three Residential Asset Mortgage Products Inc. issues; and six classes from one Soundview Home Equity Loan Trust issue. The rating actions were attributed to changes to Fitch's subprime loss forecasting assumptions that "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness." Fitch can be found online at http://www.fitchratings.com.

Standard & Poor's Ratings Services has lowered its ratings on 46 tranches from nine U.S. trust preferred collateralized debt obligations backed in part by trust preferred securities issued by mortgage real estate investment trusts.S&P also removed from CreditWatch with negative implications 39 CDO ratings. In addition, it affirmed the ratings on five tranches from two trust preferred CDOs and removed them from CreditWatch negative. The downgrades primarily reflect the weakening credit quality of the mortgage REIT assets in the CDO collateral pools, the rating agency said, noting that many REITs and other mortgage originators and purchasers have recently had trouble getting funding to finance their operations because of mortgage market conditions. Including the latest downgrades, S&P said it had downgraded 121 tranches from 27 cash flow and hybrid CDOs with exposure to U.S. residential mortgage-backed securities (and other securities) that have been hit with negative rating actions since July. In addition, the ratings of 117 tranches from 40 cash flow and hybrid CDO transactions are still on CreditWatch with negative implications. S&P can be found online at http://www.standardandpoors.com.

Mortgage company stocks should react positively to a rate cut by the Federal Reserve, but it will be short-lived because rising credit costs and a "tougher origination environment" will be drag on earnings, according to a Friedman Billings Ramsey report."It will be tough going for mortgage banking companies for the next 12 to 24 months," FBR analyst Paul Miller Jr. says in the Sept. 14 report. And it will be a particularly tough adjustment for companies that generated most of their earnings from gain-on-sale income or hold a large percentage of nonagency products in their portfolios. But banks and thrifts that took a cautious approach to credit risk should benefit from the current environment, according to the FBR analyst. "Additionally, a Fed rate cut should help improve margins as funding costs move lower," Mr. Miller said. The Federal Open Market Committee meets Sept. 18 to consider a cut in the Fed Funds rate.

Countrywide Financial Corp. Chairman Angelo Mozilo said Thursday that rising loan delinquencies are not being caused by adjustable-rate mortgage "resets" but by a combination of job losses exacerbated by falling home values -- particularly in California.In an interview with National Mortgage News, Mr. Mozilo said news media reports that resets are causing delinquencies are being blown out of proportion. "Resets are not the reason for delinquencies and foreclosures," he stressed. He also said that Countrywide is working with customers who are having trouble with resets by not increasing their loan rate. "If they are struggling to make the payment, we will not increase the rate," he told NMN. The Calabasas, Calif.-based company can be found online at http://www.countrywide.com.

Four classes of Securitized Asset Backed Receivables LLC 2005-FR1 have been placed on Rating Watch Negative by Fitch Ratings.The affected securities were classes B-1, B-2, B-3, and B-4. In addition, Fitch affirmed the ratings on three other classes in the deal. Fitch said the securities were placed on watch pending receipt of additional performance information that could affect the ratings. The collateral in the transaction consists of subprime residential loans secured by first- and second-lien deeds of trust on residential properties, the rating agency said.

Class B-2 of C-BASS mortgage pass-through certificates, series 2005-RP1, has been downgraded from BBB to BB by Fitch Ratings.Fitch also affirmed the ratings on nine other classes in the transaction. The downgrade was attributed to recent changes to Fitch's subprime loss forecasting assumptions that "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness."

Two classes from C-BASS mortgage loan asset-backed certificates series 2003-RP1 have been downgraded by Fitch Ratings.Class B-1 was downgraded from BBB to BB, and class B-2 was downgraded from BB to CCC/DR2. Fitch also affirmed the ratings on three classes in the transaction. The downgrades reflect deterioration in the relationship between credit enhancement and loss expectations, the rating agency said. The trust consists primarily of one-to four-family, adjustable- and fixed-rate mortgage loans, FHA-insured and VA-guaranteed mortgage loans, manufacturing housing installment contracts, and installment loan agreements secured by first, second, or third liens on residential properties.