Servicing

Washington Mutual Inc., Seattle, has reported net income of $830 million ($0.92 per share) for the second quarter, up from $767 million ($0.79 per share) a year earlier, although its Home Loans group recorded a net loss.The Home Loans group took a loss of $37 million in the second quarter, compared with a net loss of $113 million in the first quarter and net income of $50 million a year earlier, WaMu said. "Net losses from the sales of subprime mortgage loans and adjustments to reflect changes in market values of loans held for sale totaled $38 million, which was a substantial improvement from net losses of $164 million in the first quarter," the company said. Prime mortgage volume rose 7% in the second quarter, while subprime mortgage production declined 30% from that of the first quarter. WaMu can be found online at http://www.wamu.com.

Standard & Poor's Ratings Services has downgraded 418 classes of securities that are backed by U.S. closed-end second-lien mortgage collateral and were issued from January 2005 through January 2007.The rating actions, involving residential mortgage-backed securities with an original balance of approximately $3.8 billion, resolved 229 CreditWatch actions taken since Oct. 6, 2006, S&P reported. Over 100 of the downgraded classes had previously been downgraded, S&P said. The rating agency said it took the actions "because it believes that losses on U.S. RMBS backed by closed-end second-lien collateral will significantly exceed historical precedent and our original assumptions." The poor performance was attributed to various factors, including looser underwriting standards; pressure on home prices; speculative borrowing; risk layering (combining several risk elements for one borrower); very high combined loan-to-value ratios; financial pressure resulting from payment increases on first-lien mortgages; and questionable data quality. "Furthermore, in the past, when borrowers had difficulty managing their mortgage payments, they were able to refinance," S&P noted, something that tighter underwriting standards, higher interest rates, and home price erosion will make more difficult.

It is difficult for investors to make a monetary recovery from a fraudulent mortgage loan, according to an attorney at an American Securitization Forum seminar titled "Mortgage Fraud Prevention -- Tools and Resources for Secondary Market Participants."Karen Gelernt of Cadwalader, Wickersham & Taft LLP said unless there is a party with deep pockets (which originators generally don't have), investors will not be made whole if they purchase a fraudulent loan. Usually the secondary market is able to resell the loan in "scratch-and-dent" packages to firms with expertise to resolve the situation, but at a deep discount. A problem with using the judicial system as a remedy, Ms. Gelernt told attendees at the July 18 session in New York, is that the investor has to prove intent, which is difficult. "After-the-fact" legal enforcement provides some satisfaction, she said, but the money is not there to make the investor whole. Another issue, Ms. Gelernt said, is that the secondary market has been willing to accept fewer pieces of paper to document the loan file. This makes it easier to perpetrate fraud, because it makes it tougher to verify that the loan actually exists.

One of two inordinately troubled Bear Stearns mortgage funds appears to have virtually no value remaining."Preliminary estimates show there is effectively no value left for the investors in the [High-Grade Structured] Enhanced Leverage Fund," Bear said in a letter to clients. Meanwhile, the value of the other fund -- the High-Grade Structured Credit Strategies Fund -- has fallen to "less than a 10th of its value from a few months ago after its subprime trades went bad," according to a July 18 article in The Wall Street Journal. Bear Stearns did not directly confirm the extent of the latter decline but did indicate in the letter that the second fund was estimated to have "very little value left." Despite this drastic decline, the High-Grade Structured Credit Strategies Fund appears to have "sufficient assets available" to "fully collateralize" a more than $1 billion repurchase facility the firm provided to it last month, Bear said.

The deterioration in the credit quality of subprime mortgages could result in losses ranging from $50 billion to $100 billion, Federal Reserve Board chairman Ben Bernanke told Congress July 19.The chairman indicated that delinquencies and foreclosures are rising faster than the Fed anticipated only a few months ago. And these problems "likely will get worse before it gets better," he said. Mr. Bernanke also told the Senate Banking Committee that he expects the Fed to issue new Home Ownership and Equity Protection Act regulations to address certain subprime lending practices, such as prepayment penalties, later this year. When asked about Federal Housing Administration reform, the Fed chairman advised the Senate to act cautiously because FHA single-family loans have high delinquency and default rates. "I would suggest moving with some caution to ensure you don't create another source of problems," Mr. Bernanke testified.

"We have a long way to go" in the subprime mortgage crisis, Countrywide chairman Angelo Mozilo told attendees in keynote remarks July 18 at the 35th Annual Western Secondary Market Conference in San Francisco.Pouring cold water on statements by other mortgage executives, including Countrywide Financial Corp.'s own Todd Dal Porto, Mr. Mozilo said the current subprime collapse is causing a paradigm shift that will bring down an avalanche of regulatory scrutiny. While declining to point blame for the subprime collapse in any particular direction, he said, "The Street stepped up to provide liquidity irrespective of underwriting" as New Century and others "went to the market time after time to get more capital" for exotic loans. The mortgage industry itself will be the real victim, Mr. Mozilo said.

The residential primary servicer rating for subprime product and the residential special servicer rating of Option One Mortgage Corp. have been placed on Rating Watch Negative by Fitch Ratings.The company's primary servicer rating is RPS1, and its special servicer rating is RSS1. (Fitch rates residential servicers on a scale of 1 to 5, with 1 being the highest rating.) Fitch said the actions reflect "the potential impact on Option One's servicing platform of decreased loan originations, changes in credit lines, as well as uncertainties regarding the sale of the servicing platform." The rating agency noted that H&R Block announced in April that Option One's servicing platform would be purchased by Cerberus Capital Management LP. "In light of challenges facing the subprime market, including the increased cost of servicing defaulted subprime loans, as well as Option One's transitioning from a publicly rated parent to an unrated nonpublic company, there are concerns regarding the company's ability to sustain its operational capabilities," Fitch said.

The B-4 classes from NAAC Reperforming Loan Remic Trust Certificates series 2004-R1 and 2004-R2 have been placed under review for possible downgrade by Moody's Investors Service.The negative rating actions were taken because credit enhancement levels are low given the projected losses on the underlying pools, Moody's said. The transactions consist of securitizations of reperforming loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, nearly all of which were repurchased from Ginnie Mae pools, according to the rating agency.

Four classes of First Horizon Home Loan Mortgage Trust mortgage-backed securities have been downgraded by Fitch Ratings and three classes have been placed on Rating Watch Negative.The downgrades were as follows: series 2006-AA3, class B4, from BB to B-plus, and class B5, from B to CCC/DR1; and series 2006-FA2, class B4, from BB to B-plus, and class B5, from B to CCC/DR2. Class B3 of series 2006-AA3 and classes B3 and B4 of series 2006-FA2 were placed on Rating Watch Negative. The negative rating actions were attributed to deterioration in the relationship between credit enhancement and expected losses. The collateral for the transactions consists of conventional fixed- and adjustable-rate mortgages secured by first liens on residential properties. Fitch can be found online at http://www.fitchratings.com.

Moody's Investors Service has placed under review for possible downgrade 66 tranches from 33 residential mortgage-backed securities deals backed primarily by first-lien alternative-A mortgage loans.The rating actions, affecting securities with an original face value of approximately $318 million, were based on higher-than-expected loan delinquency rates and pool losses, Moody's said. The deals have not experienced significant losses to date, but Moody's said credit enhancement may be low in view of the amount of loans in foreclosure and held as real estate owned. "Moody's has noted a negative trend in delinquencies for first-lien, alt-A mortgage loans originated in late 2005 and 2006," the rating agency said, citing data indicating that they have higher-than-expected delinquency rates. The loans were originated in an environment of "aggressive underwriting" that contributed to significant deterioration in loan performance, Moody's said. Half of the tranches placed under review, 33, come from 11 deals issued by CWABS Asset-Backed Certificates Trust and CWALT Inc. Mortgage Pass-Through Certificates, and 13 come from eight deals issued by Bear Stearns Alt-A Trust and Bear Stearns Asset Backed Securities I Trust, Moody's reported.