Servicing

To calm financial markets, the Federal Reserve Board has unexpectedly cut the discount rate it charges banks and thrifts for emergency funding by 50 basis points, to 5.75%, and extended the loan terms to 30 days, with the added provision that these credits are renewable.The central bank also made it clear that the depository institutions can use home mortgages and related assets as collateral for these short-term loans. "These changes are designed to provide depositories with greater assurance about the cost and availability of funding," the Federal Reserve said. The Fed's monetary policy committee also issued a statement that lays the groundwork for a future cut in the federal funds rate, which could benefit homeowners who are facing resets on their adjustable-rate mortgages. In acknowledging that financial market conditions have "deteriorated," the committee said, "it is prepared to act as needed to mitigate the adverse effects on the economy arising from disruptions in financial markets."

Sen. Charles E. Schumer, D-N.Y., says he will introduce emergency legislation to raise the caps on Fannie Mae's and Freddie Mac's portfolios if the Bush administration does not act soon.The Office of Federal Housing Enterprise Oversight recently rejected a request by Fannie Mae to lift the cap on its portfolio -- preventing the government-sponsored enterprise from providing liquidity for the subprime market. Sen. Schumer warned that the problems in the subprime sector are spilling over into the broader mortgage market and that the administration should act now. "We cannot afford a 'wait-and-see' approach when it comes to a credit crisis that threatens to derail our economy," the Senate Banking Committee member said. He said he plans to introduce his bill, if necessary, as soon as Congress returns from its August recess after Labor Day.

Class M6 of Meritage Mortgage Loan Trust series 2003-1 has been placed on review for possible downgrade by Moody's Investors Service.The rating action was attributed to credit enhancement levels that may be low given the projected losses on the underlying pools. "Overcollateralization has declined due to losses and the transaction has stepped down, causing the subordinated certificates to start receiving their share of unscheduled prepayments," Moody's said. "In addition, the severity of loss on liquidated loans has begun to increase." The transaction is backed primarily by first-lien adjustable- and fixed-rate subprime mortgage loans originated by Meritage Mortgage Corp.

Forty-one certificates from 13 securitizations issued by First Franklin Mortgage Loan Trust have been placed on review for possible downgrade by Moody's Investors Service.In addition, three classes were placed on review for possible upgrade. "The actions are based on the analysis of the credit enhancement provided by subordination, overcollateralization, and excess spread relative to the expected loss," Moody's said. The collateral consists primarily of first-lien, subprime fixed- and adjustable-rate mortgage loans (except for one transaction backed by closed-end second-lien mortgage loans).

Four tranches from three Merrill Lynch Mortgage Investors Inc. deals issued in 2003 have been downgraded by Moody's Investors Service.The downgrades were as follows: series 2003-WMC1, class B-1, from Baa2 to B1, and class B-2, from Baa3 to Caa1; series 2003-WMC2, class B-2, from Baa2 to B1; and series 2003-WMC3, class B-3, from Baa3 to Ba1. Moody's also confirmed the rating on one Merrill certificate. The downgrades were attributed to credit enhancement levels that are low given the projected losses on the underlying pools. "The pools of mortgages have seen losses in recent months and future loss could cause a more significant erosion of the overcollateralizaton," the rating agency said. The transactions consist of subprime first-lien adjustable- and fixed-rate mortgage loans. Moody's can be found online at http://www.moodys.com.

DBRS, a Toronto-based rating agency, has downgraded 63 classes of residential mortgage-backed securities from 21 RMBS transactions.DBRS also placed five other classes under review with negative implications, and upgraded one class. The negative rating actions were based on an increase in the pipeline of 90-day-plus delinquencies relative to the available credit enhancement, the rating agency said.

Fitch Ratings has placed all classes of 58 U.S. RMBS subprime transactions backed by pools of closed-end second-liens on Rating Watch Negative.The 58 transactions -- 35 of which were originated in 2005, 22 in 2006, and one this year -- have an aggregate outstanding balance of approximately $12.1 billion, the rating agency reported. The transactions constitute "the entirety of Fitch's rated portfolio" of closed-end second-lien residential mortgage-backed securities from those vintages. "Although the performance of individual transactions varies, the CES sector as a whole has significantly underperformed from original expectations," Fitch said. "Ongoing pressure from the combination of a declining housing market, weak loan underwriting standards, and interest rate resets on the associated adjustable-rate first liens has led to high delinquencies, rising losses, and a rapid deterioration of credit enhancement for these securities." Fitch can be found online at http://www.fitchratings.com.

Fannie Mae reported 2006 earnings of $4.1 billion, down from $6.3 billion in the prior year, due to a 41% drop in net interest income and a 22% drop in the profitability of its single-family business.The mortgage giant said net income from the single-family business fell to $2.04 billion last year, despite an increase in revenues. Fannie attributed the drop-off in profitability to a $308 million increase in losses on single-family guaranty contracts, a $533 million increase in administrative costs, a $123 million increase in loan loss reserves, and a $218 million increase in foreclosure expenses. "We anticipate the losses we incur at inception of guaranty contracts will more than double in 2007 compared to 2006, primarily as a result of the decline in home prices, as well as continued investment in loans that support the company's housing goals," the government-sponsored enterprise said. Fannie executives also affirmed that the publicly traded company will file its 2007 annual report by the end of February 2008, which would be in compliance with the Securities and Exchange Commission's filing deadline. The GSE can be found online at http://www.fanniemae.com.

Countrywide Financial Corp. saw its share price plunge Wednesday to a four-year low ($19.25) after a Merrill Lynch analyst told clients that if enough "financial pressure is placed" on the nation's largest lender it may file for bankruptcy protection.At deadline time, Countrywide chairman and chief executive Angelo Mozilo was in meetings and could not be reached for comment. Rumors also began anew that it might be talking to potential suitors, including Bank of America. Meanwhile, sources told MortgageWire that CFC was contemplating exiting the correspondent loan market where it is, by far, the largest player. The Merrill report notes that Countrywide, which owns a depository, has $185 billion in credit facilities available to the company but that the lines of credit can be "terminated or changed meaningfully." Merrill downgraded the stock to "sell" from a "buy." Though Countrywide's shares traded as low as $19.25 on Wednesday, the price recovered to $20.84, down 15% on the day.

The beleaguered Countrywide Home Loans, Calabasas, Calif., is expected to shift its production into mostly GSE and government-backed loans as the secondary market's liquidity crisis worsens, according to a new report issued by Credit Suisse.Countrywide is not only the nation's largest overall residential funder, but the biggest subprime originator as well, according to National Mortgage News. In the subprime sector, it has a market share of 8.87%. The Credit Suisse report says the lender will shift "its origination mix towards predominantly [government-sponsored enterprise] eligible paper, which solidifies its ability to sell its production. Clearly, origination volumes should decline dramatically in the present environment." CS analyst Moshe Orenbuch notes that Countrywide has now tapped an $11.5 billion credit facility, 70% of which has an existing term greater than four years. He writes that the short-term financing market "has virtually shut down." In response to Countrywide's liquidity problems, Fitch Ratings downgraded the company's long-term issuer default rating from A to BBB-plus, citing "the unprecedented disruption in the capital markets." Moody's Investors Service downgraded the senior debt ratings of Countrywide and its parent company, Countrywide Financial Corp., from A3 to Baa3 and the rating on deposits of Countrywide Bank FSB from A2 to Baa1.