Servicing

The chief economist of Moody's Economy.com says he expects mortgage credit quality to "erode measurably" between now and the summer of 2008.Speaking with reporters on a conference call, prominent housing economist Mark Zandi predicted that the industry will see slightly more than 1.2 million mortgage defaults this year and 1.3 million next year. By contrast, about 800,000 mortgages defaulted in 2005. Mr. Zandi said those defaults will lead to about $125 billion of losses for investors in mortgage-backed securities, an estimate significantly higher than Federal Reserve Board Chairman Ben Bernanke's recent prediction that the subprime lending crisis could cause $50 billion to $100 billion in losses.

Four certificates from two Finance America Mortgage Loan Trust securitizations issued in 2004 have been downgraded by Moody's Investors Service.The downgrades were as follows: series 2004-1, class M6, from A3 to Baa2, class M7, from Baa1 to Ba2, and class M8, from Baa2 to B3; and series 2004-2, class M-9, from Baa3 to Ba2. The downgrades were attributed to credit enhancement levels that may be low given the projected losses. "Both transactions have stepped down, causing the subordinated certificates to start receiving their share of unscheduled prepayments," Moody's reported. "In addition, the severity of loss on liquidated loans has begun to increase." The transactions are backed primarily by first-lien adjustable- and fixed-rate subprime mortgage loans.

ECC Capital Corp., a real estate investment trust based in Irvine, Calif., has announced that it plans to deregister its common stock because of the costs of compliance with the Sarbanes-Oxley Act and other reporting requirements.The REIT said it will file a Form 15 with the Securities and Exchange Commission to deregister the stock on or about July 30. ECC Capital is eligible to deregister because it has fewer than 300 common stockholders of record, the company said. "ECC Capital is deregistering because it believes that the incremental cost of compliance with the Sarbanes-Oxley Act of 2002 and other public company reporting requirements does not provide a discernible benefit to ECC Capital and is not in the best interest of its shareholders," the company said. The mortgage finance REIT can be found online at http://www.ecccapital.com.

Weak earnings from Countrywide Financial Corp. have sparked renewed concern about the housing sector, helping fuel a widespread selloff in the stock market.Countrywide, which reported earnings that missed Wall Street's consensus estimate and were down sharply from year-earlier levels, led the stock downturn among mortgage stocks. Countrywide's share price fell $3.73, or almost 11%, in trading on July 24. But the biggest decline came at subprime shop Accredited Home Lenders, where the share price fell $1.95, or 15%. News reports attributed the drop to concern about whether Accredited's deal to be acquired by a private equity firm will be completed. Another subprime lender, Delta Financial Corp., saw its stock price fall 10% for the day. Mortgage insurance stocks also were hard hit, with Triad Guaranty, PMI, Radian, and MGIC all seeing their share prices fall more than 6% on the day. The Dow Jones industrial average fell 226 points, or 1.62%, on the day. By midday Wednesday, the Dow had regained more than 40 points.

Twenty-six classes from 12 structured finance collateralized debt obligations have been placed on Rating Watch Negative by Fitch Ratings.The actions, which affect approximately $603 million of notes in CDOs issued between 2001 and 2006, were attributed to collateral deterioration related to recently downgraded or watchlisted subprime residential mortgage-backed securities. The affected CDOs are as follows: Bluegrass ABS CDO III Ltd.; Diversified Asset Securitization Holdings III LP; Fulton Street CDO Ltd./Funding Corp.; Independence IV CDO Ltd.; Independence V CDO Ltd.; Independence VII CDO Ltd.; Libertas Preferred Funding I Ltd.; Northlake CDO I Ltd.; Oceanview CBO I Ltd.; Pacific Coast CDO Ltd.; South Coast Funding III Ltd.; and Whately CDO I Ltd./Corp. Fitch said CDO tranches placed on Rating Watch Negative as a result of recent subprime RMBS credit deterioration now total approximately $1.4 billion of notes from $16 billion of CDOs, representing approximately 17% of Fitch-rated U.S. CDOs.

Twenty-two tranches issued by CSFB Home Equity Asset Trust have been downgraded by Moody's Investors Service, and 32 HEAT tranches have been placed on review for possible downgrade.The collateral backing each deal consists primarily of first-lien, subprime fixed- and adjustable-rate mortgage loans. The negative rating actions were attributed to an increasing rate of "severely delinquent" loans and recent losses that have eroded overcollateralization below its targeted level. "The timing of losses, coupled with passing of performance triggers, has caused the protection available to the subordinate bonds to be diminished," Moody's said. The rating agency can be found on the Web at http://www.moodys.com.

The issuance of subprime mortgage-backed securities totaled $25.9 billion in June, down nearly 55% from the level recorded in June 2006, and a Friedman Billings Ramsey researcher says he expects subprime securitizations to remain at the $25 billion-a-month level for the rest of the year."It looks like a sustainable rate," FBR managing director Michael Youngblood said, considering that the rate on the 10-year Treasury note dropped below 5% recently, which should help to make subprime fixed-rate product more attractive to borrowers. However, the FRB researcher said he will be looking to FBR's August report for confirmation. He noted that July is a seasonally weak month for subprime MBS issuance. Mr. Youngblood said there are multiple factors involved in the sharp decline in subprime MBS and originations, including the decision by some major lenders to stop offering popular subprime products -- adjustable-rate 2/28 and 3/27 mortgages. In addition, there is a shift to fixed-rate products as lenders tighten and underwrite ARMs at the fully indexed rate. Right now a newly originated subprime fixed-rate loan at 9.5% is more attractive to a borrower stretching to buy a home or refinance than a 2/28 ARM at 9% because the fully indexed rate is 11.25%. "If you are underwritten at a higher rate, you will go for the fixed rate," Mr. Youngblood said in an interview.

Countrywide Financial Corp., Calabasas, Calif., has reported net income of $485.1 million ($0.81 per share) for the second quarter, up from that of the first quarter but down 33% from $722.2 million ($1.15 per share) a year earlier due in part to $417 million of impairment charges.The company said the charges included $388 million on residual securities collateralized by prime home equity loans, stemming from accelerated delinquencies and higher estimates of future defaults and loss severities. However, pretax earnings by the mortgage production sector rose from $139 million in the first quarter to $439 million, chiefly as a result of improved gain-on-sale and net warehouse spread margins and lower expense rates, the company said. "Consolidated quarterly funding volume was the third-highest in our history, prime production margins were relatively stable, and subprime production margins substantially improved," said Angelo R. Mozilo, Countrywide's chairman and chief executive, adding that the sector's pretax profit was at the highest level since the first quarter of 2005. The servicing sector took $147 million in pretax losses, compared with $279 million in pretax earnings a year earlier, the company reported. Countrywide can be found online at http://www.countrywide.com.

Two classes of Luminent Mortgage Loan Trust series 2006-3 have been downgraded by Fitch Ratings.Class II-B-4 was downgraded from BB to B-plus, and class II-B-5 was downgraded from B to CCC and assigned a Distressed Recovery rating of DR2. In addition, the ratings on four other classes in the transaction were affirmed. The downgrades were attributed to a deterioration in the relationship between credit enhancement and loss expectations. The collateral consists of adjustable-rate mortgage loans.

Ten classes from four issues of Structured Asset Securities Corp. mortgage pass-through certificates have been downgraded by Fitch Ratings, and five classes have been placed on Rating Watch Negative.In addition, two classes were upgraded, and the ratings on 31 other classes in five SASCO transactions were affirmed. Fitch attributed the downgrades to a deterioration in the relationship between credit enhancement and loss expectations. The collateral in the pools consists of fixed- and adjustable-rate conventional mortgages, substantially all of which have original terms of 30 years. The rating agency can be found on the Web at http://www.fitchratings.com.