Servicing

More than 90 classes of subprime residential mortgage-backed securities with outstanding balances totaling over $1.25 billion were downgraded by Fitch Ratings on Aug. 3.Fitch also affirmed the ratings on classes with outstanding balances of more than $10.5 billion. Among the downgrades were the following mortgage pass-through certificates: 28 classes from three issues of HSI Asset Securitization Corp.; 15 classes from three issues of Mortgage Asset Securitization Transactions Asset Back Securities Trust; 15 classes from two Citigroup issues; and 12 classes from three issues of Asset Backed Securities Corp. The rating actions were based on changes to Fitch's subprime loss forecasting assumptions, which "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness," the rating agency said. Fitch reported that as of the end of the day on Aug. 3, it had downgraded 389 such classes (from subprime RMBS deals placed Under Analysis on July 12) with an outstanding balance of $7 billion, and affirmed the ratings on 721 classes with an outstanding balance of $58 billion. Fitch can be found online at http://www.fitchratings.com.

The credit performance of alternative-A loans is expected to tumble over the winter, with the default rate hitting 4% by the end of next May, up 45% from the current default rate, according to a Friedman Billings Ramsey report.The default rate on alt-A mortgages stood at 2.69% this past May after rising for 24 consecutive months. The FBR report says the performance of alt-A loans, which have higher credit scores than subprime loans, will "worsen relatively much more in the year ahead" than subprime and prime loans that are placed in private-label securities. "As the negative news about the mortgage and corporate debt markets became a tsunami last week, we updated our econometric models, and offer the following forecasts of the default rates of prime, Alt-A and subprime loans through May 2008," the Aug. 3 FBR report says. The default rate on "subprime loans should rise to 14.57%" in May 2008 from 12.4% in May of this year, while the default rate on "prime loans should rise to 0.53%" in May 2008 from 0.37% currently, according to the FBR researchers. (The default rate includes loans that are 90 days or more past due, in foreclosure, or real estate owned.)

Two bond market associations are urging the Federal Reserve Board to be careful in writing new rules to stop abusive subprime lending practices and to ensure that any violations of its Home Ownership and Equity Protection Act regulation do not trigger assignee liability for mortgage investors."At a minimum, we request that, in any proposed and final regulations under Section 129, the Board explicitly confirm that violations of new substantive regulations may not be asserted against an assignee (unless the related loan is a high cost loan)," says a joint comment letter by the American Securitization Forum and the Securities Industry and Financial Markets Association. (The vast majority of subprime mortgages are not "high-cost loans" as defined by HOEPA.) The ASF and SIFMA also urge the Fed to concentrate on improving mortgage disclosures as the best way to protect consumers, as opposed to restricting prepayment penalties or requiring escrow accounts on subprime loans. "In our view, the Board should focus its efforts on preventing unfair and deceptive lending practices in connection with HOEPA loans through creating uniform mortgage disclosures for borrowers, and not prohibiting products or features that are not inherently unfair or deceptive."

Investment banker Nomura Securities has closed its nonconforming mortgage conduit and laid off staff in its fixed-income research department, industry sources have told MortgageWire.Meanwhile, one executive close to Wall Street said three major investment banking houses he has done business with are "prepping" their mortgage departments for layoffs. At deadline time, a Nomura spokesman had not returned telephone calls. Nomura exited the mortgage trading business last fall, when it shifted its mortgage origination/purchase business into a dedicated company with an asset management unit.

Fears of a worsening credit crunch triggered a sell-off in the stock market Friday that took a heavier toll on mortgage stocks than on the market as a whole.The Dow Jones industrial average fell 281 points, or 2.1%, on the day, but 16 of the 18 mortgage stocks tracked by MortgageWire declined by higher percentages. NetBank, an online bank, and Radian Group, a mortgage insurer, led the downturn among these mortgage stocks, as NetBank's share price fell $0.05, or 18.5%, and Radian's fell $3.75, or 14.2%. Other mortgage stocks that fell more than 5% on the day were Franklin Bank, down 10.7%; LandAmerica Financial, down 9.6%; Doral Financial, down 9.1%; Triad Guaranty, down 8.8%; PMI Mortgage, down 7.7%; Delta Financial, down 7.0%; Countrywide Financial Corp., down 6.6%; IndyMac Bancorp, down 6.6%; Washington Mutual Inc., down 6.6%; and Kaufman & Broad, down 5.4%. News reports attributed the stock plunge to remarks by Bear Stearns officials saying that the mortgage-related credit crunch has led to the worst conditions in the fixed-income markets in more than two decades (see item above). As of around 1 p.m. Monday, the Dow was up by more than 90 points.

Bears Stearns officials indicated in an Aug. 3 teleconference that the market's recent mortgage-related credit crunch has led to the worst conditions in the fixed-income markets in more than two decades, but said the company is prepared to weather the storm.Comparing the recent credit crunch to other major market disruptions over the past four decades, Bear's chairman and chief executive officer, James E. Cayne, said he believed the company will survive the current crisis as it has past ones. The company's chief risk officer, Michael Alix, said the company has been adjusting its mortgage business accordingly as demand for product in the market has slowed, and it has hedged its positions in troubled asset classes.

Standard & Poor's Ratings Services has revised the outlook for Bear Stearns & Co. from stable to negative in a move the Wall Street firm said it is "disappointed" with.S&P cited Bear's "high degree of reliance on the U.S. mortgage and leveraged finance sectors" in its outlook revision. Bear Stearns said the concerns in these areas "are common to the industry and are not likely to have a disproportionate impact" on the company. "All other major rating agencies have affirmed their stable or positive outlook on Bear Stearns," the Wall Street firm said. S&P can be found on the Web at http://www.standardandpoors.com.

Bear Stearns co-president and co-chief operating officer Warren Spector resigned Aug. 5 in the wake of a costly collapse of two Bear-sponsored hedge funds that invested in risky subprime-related assets.The two funds -- once valued at more than $40 billion -- filed for bankruptcy protection early last week. Bear told investors in the funds that one was worthless, and the other had lost 90% of its value. The two funds were housed in an asset management group that Mr. Spector oversaw. Alan Schwartz, who had been Bear Stearns' other co-president and co-COO, was named sole president. "In light of the recent events concerning [Bear Stearns Asset Management's] High Grade and Enhanced Leverage funds, we have determined to make changes in our leadership structure," Bear chairman and chief executive James Cayne said. "I have every confidence in this team to continue Bear Stearns' 84-year legacy of success and profitable growth." Spector, 49, had spent his entire career at Bear Stearns since joining the firm as a trader in 1983. Bear Stearns can be found at http://www.bearstearns.com.

More than 100 classes of subprime residential mortgage-backed securities with outstanding balances totaling over $3 billion were downgraded by Fitch Ratings on Aug. 2.Fitch also affirmed the ratings on classes with outstanding balances of more than $20 billion. Among the downgrades were: 47 classes from 10 issues of Morgan Stanley mortgage pass-through certificates; 46 classes from nine issues of J.P. Morgan Mortgage Acquisition Corp. asset-backed mortgage pass-through certificates; 20 classes from three ACE Securities mortgage pass-through certificates; and 19 classes from three issues of Societe Generale mortgage pass-through certificates. The rating actions were based on changes to Fitch's subprime loss forecasting assumptions, which "better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness," the rating agency said. Fitch reported that as of the end of the day on Aug. 2, it had downgraded 291 such classes with an outstanding balance of $5 billion and affirmed the ratings on 526 classes with an outstanding balance of $46 billion.

The residential servicer ratings of American Home Mortgage Servicing Inc. have been downgraded from RPS3-plus to RPS3-minus by Fitch Ratings and placed on Rating Watch Negative.The affected ratings were the company's residential primary servicer ratings for prime product, for alt-A product, and for home equity/home equity lines of credit. (Fitch rates residential servicers on a scale of 1 to 5, with 1 being the highest rating.) "The rating actions reflect the announcement on July 28, 2007, by American Home Mortgage Investment Corp., a real estate investment trust, that it would delay the payment of its common stock dividends to shareholders and will likely delay its interest payments on its cumulative redeemable preferred stock in an effort to preserve liquidity in the face of significant market pressure," Fitch said. "The company also announced significant layoffs and indicated it is facing sizable margin calls and was not able to fund its pipeline." Fitch can be found online at http;//www.fitchratings.com.