Servicing

Standard & Poor's latest assessment of first-lien alternative-A credit residential mortgage-backed securities issued between October 2005 and December 2006 leaves 158 classes downgraded and affirms/removes 82 Alt-A classes from CreditWatch negative.The rating agency said the move resolves 237 outstanding CreditWatch actions in this portion of the market and also includes downgrades on three classes from Bear Stearns Alt A Trust 2005-10 that were not previously on CreditWatch. S&P can be found on the Web at http://www.standardandpoors.com.

KKR Financial Holdings LLC has agreed to sell 16 million of its common shares to seven unaffiliated institutional investors in separately negotiated transactions and its board of directors has approved a public rights offering of up to $270.0 million to its common shareholders.The investors in the 16 million shares are certain funds managed by Farallon Capital Management, L.L.C., Fir Tree Partners, JGE Capital Management, Marsico Capital Management, Morgan Stanley, Oak Hill Advisors, and Sageview Capital LP, according to the company. The proceeds from the 16 million shares total $230.4 million, KKR Financial Holdings said. The publicly traded affiliate of buyout firm Kohlberg, Kravitz, Roberts & Co. had previously said after suffering damage from the market's credit crunch that it no longer intends to invest in residential home loan assets and would dispose of its portfolio either through runoff or through a "strategic alternative," which may include a sale of the common stock of its real estate investment trust subsidiary. KKR can be found online at http://www.kkrfinancial.com.

Luminent Mortgage Capital, a San Francisco-based real estate investment trust that has been having liquidity problems, has penned a letter of intent to sell warrants equal to a 49% voting equity stake and 51% economic interest to Arco Capital Corp., San Juan, P.R.Arco also arranged for the repurchase of $65 million in mortgage securities portfolios. The warrants have an exercise price of $0.18 per share. Luminent's board of directors audit committee has decided not to seek its shareholder approval for the issuance of the warrants. The company said seeking such approval could seriously further jeopardize the financial viability of Luminent. "The board believes that even with the possibility of sizeable dilution to existing Luminent stockholders, the transactions proposed by the letter of intent with Arco create the best path both to attempt to protect current value and grow potential value going forward," said Trez Moore, Luminent chief executive.

Thornburg Mortgage Inc. has sold $20.4 billon or 35.5% of its portfolio of highly rated jumbo mortgage securities at a loss in an effort to ride out the market's liquidity squeeze and resume lending again.The publicly traded real estate investment trust will realize a $930 million loss as a result of the mortgage sales that involved assets with the lowest yields that were trading at negative spreads. It was "painful," Thornburg president and chief operating officer Larry Goldstone said during an interview on TV-CNBC. "But essentially, we just solved the repricing risk of our portfolio over the course of the last week." The sales helped the Santa Fe, NM, mortgage REIT raise cash and reduce its funding needs. Now it is planning to reopen its loan lock desk and resume normal lending operations over the next two weeks. "Going forward, we can be somewhat optimistic," Mr. Goldstone said.

House Financial Services Committee chairman Barney Frank, D-Mass., has scheduled a Sept. 5 hearing on the crisis in the mortgage and credit markets and the implications for consumers and the economy.Top Treasury Department and Federal Reserve Board officials are scheduled to testify first. Mortgage banking industry and other market participants will testify on a second panel. The committee did not release a witness list in announcing the hearing.

Originator Amstar Mortgage Corp., Houston, has laid off most of the staff at its corporate headquarters and its parent company said it will eventually divest the company to concentrate on more profitable ventures.In a statement, the company blamed large lenders that owe Amstar Mortgage substantial money but are now in or will need to seek bankruptcy protection. The statement also said Amstar is speaking with an unnamed company about managing its branches so service can be maintained. Amstar Mortgage has 116 branches, was licensed in 31 states and originated over $1 billion in loans a year.

Moody's Investors Service has announced downgrades on 691 vintage 2006 securities (with original face value of $19.4 billion) backed by subprime closed-end second lien mortgage loans.Moody's said the Aug. 16 rating actions affect securities representing 76% of the dollar volume and 84% of the securities rated by Moody's in 2006 that were backed by subprime closed-end second-lien loans. An additional 14 classes were placed on review for possible downgrade. "The actions reflect the extremely poor performance of closed-end second-lien subprime mortgage loans securitized in 2006," the rating agency said. "These loans are defaulting at a rate materially higher than original expectations. Aggressive underwriting combined with prolonged, slowing home price appreciation has caused significant loan performance deterioration and is the primary factor in the negative rating actions."

Standard & Poor's Ratings Services has downgraded the counterparty credit rating of Countrywide Financial Corp. from A/A-1 to A-/A-2, while affirming its A/A-1 counterparty credit ratings on Countrywide Bank FSB and Countrywide Home Loans Inc..All ratings are on CreditWatch Negative. The downgrade reflects "the incremental liquidity and earnings stress, as well as our notching criteria and the fact that new debtholders will become subordinate to the operating company's debtholders as the company finalizes its restructuring phase," said S&P credit analyst Victoria Wagner. The affirmations reflect the "strong capital and credit profile" of Countrywide Bank and CHL's ongoing integration into the bank, which S&P said should improve its funding and liquidity profile. The dislocation of the mortgage capital markets has accelerated the integration, so that the bank will now be the primary source of earnings and hold the majority of the consolidated assets, S&P said. S&P can be found online at http://www.standardandpoors.com.

Nervous depositors rushed to pull money out of Countrywide's thrift unit on Thursday, according to a report in the Los Angeles Times.The newspaper did not offer any withdrawal figures, but described the scene at some of Countrywide's branches as something that has not been witnessed since the nation's savings-and-loan crisis of the mid-1980s. The newspaper reported that one depositor who pulled money out was Bill Ashmore, president of Impac Mortgage, an alternative-A lender that competes against Countrywide. (Impac itself is having financial difficulties.) Mr. Ashmore withdrew $500,000 from Countrywide Bank and transferred it to an account at Bank of America.

Shares of Countrywide Financial Corp. rallied about 10% on Friday after the Federal Reserve cut a key interest rate early in the day.Meanwhile, a new analyst report on Countrywide by Morgan Stanley predicts that the nation's largest lender likely "will work out a cash flow positive plan in this challenging environment by migrating mortgage production" to its thrift unit. On Wednesday a Merrill Lynch report called Countrywide's stock a "sell," suggesting that the company could file for bankruptcy protection if the secondary market's liquidity crisis worsens. On Friday morning the Fed slashed the discount rate (the rate it charges banks for loans) to 5.75% from 6.25%, making cheaper financing available to any depository that needs cash. (See story above.)