Servicing

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.

Three classes of notes issued by Taberna Preferred Funding II Ltd., a collateralized debt obligation consisting in part of securities issued by real estate investment trusts, have been placed on Rating Watch Negative by Derivative Fitch.The affected securities were the class E-1, class E-2, and class F notes. Taberna II is a CDO backed primarily by trust-preferred securities issued by REITs and homebuilders. The negative rating actions were attributed to "the rapid deterioration in the credit quality of several residential mortgage REITs underlying the transaction," including two unnamed REITs that recently filed for bankruptcy protection. The rating agency can be found online at http://www.derivativefitch.com.

Three classes of notes issued by E*Trade ABS CDO I Ltd/LLC have been downgraded by Fitch Ratings and removed from Rating Watch Negative.The downgrades were as follows: class B, from BBB to B/DR1; class C-1, from CC/DR3 to C/DR6; and class C-2, from CC/DR3 to C/DR6. Fitch also affirmed the rating on one other class in the deal. E*Trade I is a static cash flow collateralized debt obligation backed by collateral consisting of asset-backed securities, residential mortgage-backed securities, commercial mortgage-backed securities, and other CDOs. The downgrades were attributed to collateral deterioration and decreased credit enhancement. The securities were placed on Rating Watch Negative on July 12 due to the negative credit migration of subprime RMBS assets.

The ratings of Irwin Home Equity Corp. as a primary servicer of second-lien and of high loan-to-value residential mortgage loans have been downgraded from SQ2-plus to SQ2-minus by Moody's Investors Service.The ratings remain on review for possible downgrade, and Moody's has reduced the company's servicing stability assessment from average to below average. Moody's said the actions reflect the volatility in the market for second-lien and high-LTV loans, and the second-quarter earnings announcement of the parent corporation, Irwin Financial, which "noted the negative performance of the Irwin Home Equity line of business." Sustained negative performance could affect the willingness and ability of the parent corporation to invest in the servicing platform. "Additionally, there is uncertainty in the company's ability to maintain its servicing performance, staffing levels, turnover rates, and the composition of the management team," Moody's said.

UBS has increased its net income in the latest quarter more than 70% despite charges from the closure of a troubled U.S. mortgage unit, but it is warning that future results may be less favorable if the market's wider credit crunch continues."If the current turbulent conditions prevail throughout the quarter, UBS will probably see a very weak trading result in the investment bank, offset by predictable earnings from wealth and asset management," the company said. "This makes it likely that profits in the second half of 2007 will be lower than in the second half of last year." During the second quarter, net profit to shareholders at the company was up 72% compared with that of the previous quarter and 79% compared with that of a year earlier.

KKR Financial Holdings, a publicly traded affiliate of buyout firm Kohlberg, Kravitz, Roberts & Co., says it will take a $40 million loss on the sale of $5.1 billion of residential mortgage loans.The company bought floating-rate and hybrid-rate assets that were hedged with interest rate derivatives. KKR Financial continues to own $5.8 billion of home loan assets, mostly in the form of mortgage-backed securities, after the sale. Because of volatility in the secondary market, KKR Financial said it may have to record an additional charge of $200 million to $250 million to resolve potential funding disruptions. The company said its portfolio consists of home loan assets with a weighted average FICO score of 728 and a weighted average loan-to-value ratio of 71%. KKR Financial Holdings said it no longer intends to invest in residential home loan assets and will dispose of its portfolio either through runoff or through a "strategic alternative," which may include a sale of the common stock of its REIT subsidiary. KKR can be found on the Web at http://www.kkrfinancial.com.

Impac Mortgage Holdings, Irvine, Calif., a top-ranked nonprime lender, lost $153 million in the second quarter, citing higher delinquencies, deteriorating market conditions, and a large increase in its loan loss reserves.Last week the publicly traded real estate investment trust -- the subject of margin calls from its warehouse lenders -- suspended originations of alternative-A loans, which until recently accounted for most of its production. During the quarter Impac funded or bought $1.3 billion in mortgages, a 41% decline from the levels recorded in both the previous quarter and the second quarter of last year. Over the past two weeks its shares have traded as low as $0.95, compared with a 52-week high of almost $10. In the second quarter of 2006, it posted a $26 million profit. Impac, a mortgage REIT, can be found online at http://www.impaccompanies.com.

The senior unsecured debt of Thornburg Mortgage Inc. has been downgraded from Ba3 to B2 by Moody's Investors Service, and Thornburg's preferred stock has been downgraded from B2 to Caa1.The ratings remain under review for possible downgrade. "These rating actions reflect further deterioration in Thornburg's liquidity position due to significant funding and valuation volatility in the single-family mortgage market, even for the prime-quality assets in which Thornburg Mortgage invests," said Moody's analyst Brian Harris. Thornburg, a real estate investment trust, focuses on originating and investing in prime jumbo single-family mortgages, and Moody's said the REIT's access to the capital markets "continues to be constrained by dislocations in mortgage pricing in the jumbo mortgage market." Moody's can be found online at http://www.moodys.com.

Eleven certificates issued by Terwin Mortgage Trust have been placed on review for possible downgrade by Moody's Investors Service.The affected securities are as follows: series 2004-1HE, class B-3; series 2004-3HE, classes M-2, M-2-X, M-3, M-3-X, B-1, B-2, and B-3; series 2004-5HE, classes B-2 and B-3; and series 2004-13ALT, class M-3. "The actions are based on the analysis of the credit enhancement provided by subordination, overcollateralization, and excess spread relative to expected losses," Moody's said. Ten of the classes are backed by subprime fixed- and adjustable-rate mortgage loans. One class, from 2004-13ALT, is backed by alternative-A adjustable-rate mortgages.