Servicing

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.

NewAlliance Bancshares Inc., New Haven, Conn., has announced the completion of a realignment of nearly $800 million of its available-for-sale investment securities, including over $600 million in mortgage-related securities.The $787.3 million portfolio realignment will create a pretax loss of about $28.3 million this year (before consideration of reinvestment income), the company reported. Of that total, $22.6 million is being recorded in the second quarter as a writedown to fair value of securities available for sale. The balance of the loss will be recorded in the third quarter as a loss on sale of securities. The securities sold include $177.6 million of balloon agency mortgage-backed securities and about $435 million of collateralized mortgage obligations. The company said the goal of the realignment is to improve the company's net interest margin and increase earnings. NewAlliance Bancshares is the parent company of NewAlliance Bank, which can be found online at http://www.newalliancebank.com.

The Homeownership Preservation Foundation, Minneapolis, has received $125,000 in support from Countrywide Financial Corp., Calabasas, Calif., and a Countrywide executive will serve on the foundation's board.The foundation said the funding will be used in its effort to prevent foreclosures in the United States through its national consumer hotline and its website. Sandor E. Samuels, executive managing director at Countrywide, has been appointed to the foundation board. "The 888-995-HOPE foreclosure counseling hotline has been a lifesaver for many homeowners across the country, and the foundation continues to be a laboratory for foreclosure prevention best practices," Mr. Samuels said. The foundation can be found online at http://www.995hope.org.

In restocking its portfolio, Freddie Mac agreed to purchase $40.4 billion in mortgage assets in June -- its largest mortgage purchase commitment in four years.The mortgage giant has allowed its portfolio to shrink since entering into a voluntary agreement with its regulator last August to cap the portfolio until its accounting systems and internal controls are fixed. Freddie Mac's monthly volume report for June shows that the portfolio could hold another $21.3 billion in mortgage assets and still be in compliance with the $724.5 billion cap, which is calculated quarterly under generally accepted accounting principles. "We have plenty of room to grow," Freddie spokesman Michael Cosgrove said. The retained portfolio grew at a 1.2% annual rate in June to an unpaid principal balance of $712.1 billion. Freddie also reported that it issued $232.4 billion in guaranteed mortgage securities during the first six months of this year, compared with $185.5 billion in the last half of 2006. Freddie Mac can be found online at http://www.freddiemac.com.

U.S. banking regulators have agreed to kick the Basel Ia risk-based capital proposal aside and give regional and community banks the option of using the "standardized" RBC approach, which many foreign banks have adopted."We are pleased with the recognition of the importance of the standardized approaches, particularly that they offer more flexibility than the earlier Basel Ia proposal," said Wayne Abernathy, executive director of the American Bankers Association. While the largest and most internationally active U.S. banks will move ahead with implementation of the Basel II "advanced" RBC approach, the federal regulators were silent in regard to allowing small banks to continue to operate under the current Basel I rules. But most observers doubt that the regulators would force the small banks to adopt the more complex standardized approach, which has more gradients of risk than Basel I, plus an operational risk component. ABA senior economist Robert Strand noted, however, that some banks strongly supported Basel Ia because of the improvements in the risk weights for residential mortgages. "We will ask that those improvements be allowed as an option under Basel I," he said.