Servicing

H&R Block has conceded in its quarterly earnings statement what many had suspected in recent weeks: that a deal to sell Option One Mortgage Corp. to Cerberus Capital Management is in trouble.Kansas City, Mo.-based Block said certain closing conditions upon which the deal is contingent are not being met. Instead of a sale of the entire Irvine, Calif.-based Option One subsidiary, H&R Block said it is working on a deal to sell its servicing platform to Cerberus while Block contemplates "divesting or winding down" its loan origination business. Block executives said the company has already laid off some 615 Option One loan origination employees. About 400 remain on the staff. Block said it is "engaged in discussions" with Cerberus to modify terms of the proposed sale of Option One, which was negotiated before turmoil in the credit markets largely crippled the subprime mortgage origination business. Block said it is negotiating to waive a requirement that Option One fund $2 billion in loans within 60 days of closing and have a minimum of $8 billion in warehouse lines of credit. Block can be found on the Web at http://www.hrblock.com, and Option One can be found at http://www.optiononemortgage.com.

Three classes from Long Beach Mortgage Loan Trust series 2003-4 have been downgraded by Fitch Ratings.The downgrades were as follows: class M-5A, from BBB to BB-plus; class M-5F, from BBB to BB-plus; and class M-6, from BB-minus to CCC/DR1. Fitch also affirmed the rating on six other classes in the deal. The downgrades were attributed to a deterioration in the relationship between credit enhancement levels and loss expectations. The transaction consists of adjustable- and fixed-rate subprime loans backed by first- and second-lien mortgages or deeds of trust.

Thirty more classes of mortgage pass-through certificates in subprime securitizations by two issuers have been downgraded by Fitch Ratings as a result of changes to the rating agency's subprime loss forecasting assumptions.Fitch also affirmed the ratings on classes with outstanding balances of more than $2 billion. The latest downgrades affect the following securities: 20 classes from five Merrill Lynch Mortgage Investors issues and 10 classes from two Long Beach issues. 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."

Ginnie Mae has announced that it will begin securitizing Department of Veterans Affairs guaranteed jumbo loans with balances above the $417,000 conforming loan limit starting Sept. 1.Currently, VA loans going into Ginnie Mae mortgage-backed securities cannot exceed the conforming loan limit. "We expect this change will expand the availability of low-cost financing and increase homeownership opportunities for America's veterans, particularly in high-cost areas, by encouraging lenders to make more VA loans," Ginnie executive vice president Michael Frenz said. Approximately 30% of the loans that back Ginnie MBS are VA-guaranteed loans. Ginnie Mae, a government-owned corporation within the Department of Housing and Urban Development, can be found online at http://www.ginniemae.gov.

Sen. Charles E. Schumer, D-N.Y., is calling on Countrywide Financial Corp. to stop steering customers into high-cost mortgages and to help its troubled subprime borrowers by waiving prepayment penalties and refinancing them into more affordable loans."I am calling on Countrywide -- as the nation's largest lender --- to bury its bad business practices and reverse some of the damage it has already inflicted on our housing market," the Senate Banking Committee member said. The New York senator referred to abusive lending practices reported in a New York Times article, which Countrywide says "contained numerous inaccuracies and 'facts' taken out of context." The Calabasas, Calif.-based lender said its business processes prohibit steering and that it does not pay its loan officers higher commissions for making subprime loans with prepayment penalties. The Office of Thrift Supervision has initiated a review of Countrywide's lending and servicing practices based on complaints by Countrywide borrowers that the Neighborhood Assistance Corporation of America brought to the regulator's attention. Countrywide can be found online at http://www.countrywide.com.

Congressionally chartered mortgage giant Freddie Mac says its second-quarter earnings fell 45% to $764 million, blaming the performance on higher credit losses caused by rising loan foreclosures.In a statement, the company said the credit losses reflect "credit deterioration on 2006 and 2007 loan originations," citing "transition rates from delinquency to foreclosure and higher loan loss severities from slower home price appreciation and higher unpaid principal balances." Freddie's revenue was flat compared with that of a year earlier, but increased fourfold from revenue in the first quarter, a period in which Wall Street was still buying subprime loans. In the second quarter, many Street firms either stopped buying altogether or slowed their purchases to a trickle, sending lenders back into the conventional market. Even though Freddie's earnings fell in the quarter, its management and guarantee income increased 22% from that of the same period last year. After the earnings announcement, the company's stock had fallen approximately 4.5% as of midday Thursday. Freddie can be found online at http://www.freddiemac.com.

Forty-six classes of mortgage pass-through certificates in subprime securitizations by five issuers have been downgraded by Fitch Ratings as a result of changes to the rating agency's subprime loss forecasting assumptions.Fitch also affirmed the ratings on classes with outstanding balances of nearly $5 billion. Among the downgrades were the following securities: 18 classes from three IndyMac ABS Inc. issues; 11 classes from one GE-WMC Mortgage Securities LLC issue; nine classes from two Terwin Mortgage Trust issues; six classes from three Asset Backed Funding Corp. issues; and two classes from one GS Mortgage Securities Corp. 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 Ratings has downgraded the issuer default ratings of six homebuilders -- Centex Corp., Hovnanian Enterprises Inc., Lennar Corp., Meritage Homes Corp., M/I Homes Inc., and Standard Pacific Corp. -- and revised the rating outlook from stable to negative for Centex, Lennar, and Meritage.The rating outlook remains negative for the other three companies as well. The IDR downgrades were as follows: Centex, from BBB-plus to BBB; Hovnanian, from BB-plus to BB-minus; Lennar, from BBB-plus to BBB; Meritage, from BB to BB-minus; M/I Homes, from BB to BB-minus; and Standard Pacific, from BB to BB-minus. Fitch also downgraded other ratings for the six homebuilders. In addition, the rating agency revised from stable to negative the rating outlooks of four other homebuilders -- D.R. Horton Inc., KB Home, MDC Holdings Inc., and Ryland Group Inc. -- while affirming their IDRs. Fitch said the new ratings and outlooks reflect its expectations for the housing market as well as company-specific performance. The rating agency said it expects the housing contraction to be "more severe" than originally anticipated for the rest of 2007, due chiefly to "tighter mortgage standards and disrupted mortgage markets," and that 2008 is likely to be "another challenging year for this sector." Fitch can be found on the Web at http://www.fitchratings.com.

The banking industry's increased exposure to mortgage-backed securities was a contributing factor to the recent liquidity disruptions in financial markets, according to a special report by A.M. Best Co., Oldwick, N.J.Volatile interest rates and greater MBS exposure may lead to lower asset valuations for banks, A.M. Best said. "Anticipation of this has contributed to recent liquidity disruptions in the financial markets, which have forced the Federal Reserve to reassert its status as lender of last resort to assure stability in the U.S. banking system," the company said. The report cites various factors contributing to the disruptions, including greater exposure to MBS stemming from "an effort to enhance yield, which has also added risk to their balance sheets." Among the other factors is the fact that the banking industry has "taken advantage of additional funding options" in recent years, "relying less on the securities portfolio for liquidity, which has led to a steady decline in highly liquid Treasury holdings," according to A.M. Best. The company can be found online at http://www.ambest.com.

Five classes of notes issued by Oceanview CBO I Ltd. have been downgraded by Fitch Ratings, and three of the classes have been removed from Rating Watch Negative.The downgrades were as follows: class A-1B, from AAA to BB-minus; class A-2, from BB-minus to CCC/DR4; class B-F, from CC/DR6 to C/DR6; class B-V, from CC/DR6 to C/DR6; and "combination securities," from AAA to BB-minus. Classes A-2, B-F, and B-V were removed from Rating Watch Negative. The rating on one other class in the deal was affirmed. Fitch attributed the downgrades to the deteriorating credit quality of the Oceanview portfolio. The transaction, a collateralized debt obligation managed by Deerfield Capital Management, is supported by a portfolio of residential mortgage-backed securities, other CDOs, commercial MBS, asset-backed securities, and corporate debt, according to Fitch. The rating agency can be found online at http://www.fitchratings.com.