Servicing

Despite a slowdown in home sales and refinancing activity, homeowners extracted $460.1 billion in home equity last year, down only slightly from $461.4 billion in 2005, according to Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard University.The biggest chunk came from cash-out refinancings, Mr. Belsky told the National Association of Home Builders at its semiannual construction forecast conference. According to Freddie Mac data, the number of cash-out refinances was down in 2006, but the amount of cash received at closing totaled $313.9 billion, compared with $270.3 billion in 2005. Based on Mr. Belsky's estimate, homesellers spent $70.2 billion of the cash they pocketed at the closing, compared with $78.7 billion in 2005. Meanwhile, new second-mortgage debt totaled $76.0 billion last year, down from $112.4 billion the previous year. Homeowners continued to use their homes like "piggy banks" last year to support their spending, he said. "This is not likely to be sustained in an environment with prices starting to fall."

Pennant Capital Management LLC, a Chatham, N.J.-based hedge fund with a 7.8% stake in PHH Corp., has called on the company to terminate its agreement to sell out to GE Capital and The Blackstone Group, a private equity giant.Instead, Pennant called on management to separate the company's two main businesses with the spinoff of its fleet management operations. This could boost shareholder returns by as much as 100% over the next three years, Pennant said in a letter to PHH management. "We believe that current conditions of the general mortgage market, the Company-specific circumstances and the tax implications of a sale and break-up of the Company will prevent realization of full value at this time," Pennant said in its letter, signed by managing member Alan Fournier. "We believe that instead, the Company should pursue a tax-free spin-off of the Fleet business." Pennant estimated that this would allow shareholders to realize a combined valuation of $48 to $66 per share over two or three years, a "vastly superior outcome" to the proposed sale to GE Capital. Under a deal announced March 15, GE Capital would acquire PHH for $31.50 a share, a total of $1.7 billion, then sell PHH's mortgage business to Blackstone for an undisclosed amount. PHH is one of the largest independent mortgage banks in the country, with a servicing portfolio of more than $150 billion.

Seven classes from two People's Choice Home Loan Securities Trust securitizations have been downgraded by Fitch Ratings, and three others have been placed on Rating Watch Negative.The downgrades were as follows: series 2004-1, class M-5, from A-minus to BBB-minus, class M-6, from BBB-plus to BB-plus, class M-7, from BBB to BB, and class M-8, from BBB-minus to BB-minus; and series 2004-2, class M-7, from BBB to BB, class M-8, from BBB-minus to BB-minus, and class B, from BB to B. Classes M-3 and M-4 of series 2004-1 and class M-6 of series 2004-2 were placed on Rating Watch Negative. In addition, Fitch affirmed the ratings on seven other classes in the two transactions. The negative rating actions were attributed to a deterioration in the relationship between credit enhancement and loss expectations. The pools consist of conventional 30-year, fixed- and adjustable-rate, first- and second-lien mortgages.

Ten classes from six Renaissance Home Equity Loan Trust securitizations have been downgraded by Fitch Ratings.In addition, the ratings on 52 other classes from 11 transactions were affirmed. Fitch attributed the downgrades to a deterioration in the relationship between credit enhancement and expected losses. The transactions are backed by fixed- and adjustable-rate subprime mortgage loans.

Twelve classes from 10 issues of Long Beach Mortgage Loan Trust residential mortgage-backed securities have been downgraded by Fitch Ratings, and nine classes have been placed on Rating Watch Negative.Fitch also affirmed the ratings on 95 other classes in the transactions. The negative rating actions were attributed to a deterioration in the relationship between credit enhancement levels and loss expectations. The transactions are backed by fixed- and adjustable-rate subprime mortgage loans.

Fifteen classes from seven Delta Funding Corp. home equity issues have been downgraded by Fitch Ratings.In addition, Fitch upgraded four classes and affirmed the ratings on 27 classes from 11 Delta Funding transactions. The downgrades were attributed to high delinquencies and a deterioration of credit enhancement. The collateral in the deals consists of fixed- and adjustable-rate, first- and second-lien subprime residential mortgage loans.

Twenty classes from 11 deals issued by SACO I Trust have been downgraded by Fitch Ratings, and one class was placed on Rating Watch Negative.In addition, Fitch affirmed the ratings on 94 classes in the 11 deals. The negative rating actions were based on "a decline in the overcollateralization amount, stemming from losses associated with the mortgage pools and exacerbated by reduced excess spread resulting from much faster-than-expected prepayments and rising interest rates," Fitch said. The transactions are backed chiefly by fixed-rate, closed-end second-lien residential mortgage loans.

Two classes of Structured Asset Investment Loan Trust residential mortgage-backed certificates have been downgraded by Fitch Ratings, and seven classes have been placed on Rating Watch Negative.Class B1 of series 2006-1 was downgraded from BBB-minus to BB-minus, and class B2 was downgraded from BB-plus to B. The Rating Watch placements were as follows: series 2006-1, classes M8 and M9; series 2006-2, classes M7, M8, and B1; and series 2006-BNC1, classes M7 and M8. In addition, Fitch affirmed the ratings on 32 classes from four SAIL transactions. The rating agency attributed the negative rating actions to a deterioration in the relationship between credit enhancement and expected losses due to higher-than-expected delinquencies and losses and to a shortfall in overcollateralization. The pools consist primarily of fixed- and adjustable-rate, fully amortizing and balloon, first- and second-lien residential mortgage loans. Fitch can be found online at http://www.fitchratings.com.

Twenty-seven classes from seven transactions issued by Structured Asset Investment Loan Trust have been downgraded by Moody's Investors Service.In addition, Moody's placed eight classes from two SAIL transactions on review for possible downgrade and confirmed the ratings on three classes. The rating agency attributed the negative rating actions to credit enhancement levels that are seen as too low based on higher-than-expected rates of delinquency. "Moreover, recent losses have begun to erode overcollateralization on a number of the downgraded deals, leaving the rated bonds less protected against future losses," Moody's said. The collateral in the deals consists of fixed- and adjustable-rate, first- and second-lien subprime residential mortgage loans. Moody's can be found on the Web at http://www.moodys.com.

Rating agencies issued a blizzard of news releases during the week of April 23 announcing downgrades and other rating actions on mortgage-backed and mortgage-related securities, many of them linked to subprime mortgage loans.The releases resulted in more than 30 news items on well over 300 downgrades of MBS, asset-backed securities supported by home equity loans, and collateralized debt obligations containing residential and commercial MBS. This was a record number of downgrade-related news items for this publication in a single week.