Servicing

A bankruptcy filing by Countrywide Financial Corp., Calabasas, Calif., would cause a "psychological impact to the world financial markets [that] would be significant," says National Association of Mortgage Brokers legislative chairman Joe Falk.Speaking at a news conference held by the California Association of Mortgage Brokers at its annual convention in Long Beach, Calif., Mr. Falk maintained that, given Countrywide's market share, there would be a short-term disruption to the marketplace until others picked up the slack. (The issue arose after a Merrill Lynch analyst told clients that if enough financial pressure were placed on Countrywide, it might file for bankruptcy protection.) Ed Smith, the CAMB's vice president of government affairs, added that the failure of any company, not just Countrywide, would put more homeowners in peril and take away their options. CAMB past president John Marcell noted that Countrywide's correspondent channel is the secondary-market outlet for a large number of small and midsize mortgage banks, arguing that if that channel went away it could have a domino effect.

The California Association of Mortgage Brokers has come up with several proposals that it says represent solutions to the current mortgage market crisis for consumers.Speaking at a news conference at the group's annual convention in Long Beach, Calif., Ed Smith, its vice president of government affairs, said the CAMB urges servicers to offer flexible repayment strategies for borrowers facing default and foreclosure, calling it an "extremely important issue for homeowners in California." The CAMB repeated its past call for Congress to declare California to be a "high-cost" state for homeownership. (Right now the only two states with that designation are Alaska and Hawaii.) The group also called on Wall Street to develop lending programs and products attractive to investors and accessible to borrowers. "As has been the case throughout history, markets fluctuate but they always recover," CAMB president Pete Ogilvie said. "CAMB stands ready to work collaboratively with regulators and other stakeholders to stimulate a strong rebound."

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.