Servicing

Merrill Lynch & Co. has agreed to buy subprime mortgage giant First Franklin Financial Corp., San Jose, Calif., and two affiliates for $1.3 billion.Meanwhile, sources have told MortgageWire that First Franklin's owner, Cleveland-based National City Corp., is now considering selling part of its 'A' paper mortgage business as well. When asked about a possible sale of National City Mortgage (see item below), a bank spokesman would only say that the unit "is not part of the strategic review" being conducted on the bank's subprime divisions. The bank announced Tuesday morning that it would sell First Franklin; National City Home Loan Services, Pittsburgh; and NationsPoint, Lake Forest, Calif., to Merrill, which already has a foot in the subprime industry through conduits and a specialty servicer called Wilshire Credit Corp., of Oregon. First Franklin ranks 10th among all subprime funders, according to the Quarterly Data Report, a MW affiliate. Subprime servicer NCHLS ranks 11th, with $44 billion in receivables. NCC said it would book a $1 billion pretax gain on the sale. First Franklin relies mostly on wholesale. NationsPoint is a direct-to-consumer lender. Merrill Lynch can be found online at http://www.merrilllynch.com, and First Franklin can be found at http://www.first-franklin.com.

Class B-5 of Terwin Mortgage Trust series 2004-EQR1 has been placed on Rating Watch Negative by Fitch Ratings.Fitch also affirmed the ratings on nine other classes in the transaction. The negative rating action was based on trends in overcollateralization stemming from "a reduction in the dollar amount of excess spread due to faster-than-expected prepayments and rising interest rates," Fitch said. The collateral for the transaction is fixed-rate subprime loans secured by second-lien mortgages on residential properties.

Class M1 of the DLJ ABS Trust series 2000-5 securitization of subprime mortgage loans has been downgraded from Aa2 to A3 by Moody's Investors Service.Moody's also confirmed the ratings of the A-1 and A-3 classes from the same transaction. The downgrade was based on the high proportion of delinquent loans relative to the available overcollateralization, the rating agency said. "Relatively high loss severities in recent months caused a significant deterioration of overcollateralization, which has since stabilized and begun to build back towards its target amount," the rating agency said. Moody's can be found online at http://www.moodys.com.

Two classes of Structured Asset Security Corp. residential mortgage-backed certificates, series 2005-S5, have been downgraded by Fitch Ratings and removed from Rating Watch Negative.Class B3 was downgraded from BB to CCC and assigned a distressed recovery rating of DR2; and class B4 was downgraded from BB-minus to C and assigned a distressed recovery rating of DR6. In addition, Fitch affirmed 12 other classes in the transaction. The downgrades were attributed to a deterioration in the relationship between credit enhancement and expected losses. Faster-than-expected prepayment rates and rising interest rates have hurt the generation of excess spread and the growth of overcollateralization, Fitch said. The mortgage pool consists of conventional, fixed-rate, fully amortizing and balloon, second-lien residential mortgage loans. Fitch can be found online at http://www.fitchratings.com.

NovaStar Financial Inc., a real estate investment trust based in Kansas City, Mo., has announced the completion of a $1 billion securitization of nonconforming mortgage assets by its subsidiary, NovaStar Mortgage.The transaction, NovaStar Mortgage Funding Trust series 2006-4, offered 17 rated classes of certificates with a face value of $1.02 billion, NovaStar said. The lead managers of the deal were Deutsche Bank Securities, RBS Greenwich Capital, and Wachovia Securities. NovaStar Mortgage can be found on the Web at http://www.novastarmortgage.com.

Home Federal Bancorp, Columbus, Ind., has announced plans to restructure its balance sheet, in part by selling "substantially all" of its mortgage servicing portfolio and corresponding mortgage servicing rights.The company said the portfolio totals approximately $537 million, and the related nonrecourse MSRs have a carrying value of approximately $2.7 million. Sandler O'Neill Mortgage Finance LP has been retained as Home Federal's exclusive agent to facilitate the sale. Home Federal said the move furthers its strategic goal of expanding commercial banking activities in Indianapolis. "Management also believes that current favorable market conditions for valuation of mortgage servicing rights suggest that such a sale at this time will be in the best interests of shareholders," the company said. Home Federal Bancorp, the holding company of HomeFederal Bank of Columbus, Indiana, can be found online at http://www.homf.com.

Mortgage companies cut their payrolls by 800 full-time positions in July, and it could be the beginning of further declines in industry employment.The U.S. Bureau of Labor Statistics reported Sept. 1 that employment in the mortgage banker/broker sector fell from 502,900 in June to 502,100 in July. The original estimate for June was revised downward from 503,100. Mortgage originations were unexpectedly strong in the second quarter. But loan applications declined dramatically in July, according to the Mortgage Bankers Association's weekly applications survey. Despite declining loan volume (particularly refinancings), employment has been surprisingly steady all year, according to the MBA's director of forecasting, Orawin Velz. Ms. Velz said she suspects that companies are laying off loan officers and hiring for their servicing shops. And these "substitutions" have keep employment at a high level so far. "We haven't seen the decline in industry employment yet, but that could be forthcoming," she said. The MBA economist sees a continuing decline in originations into next year as the housing market adjusts and normalizes, which would usually force mortgage companies to shed employees. The BLS can be found online at http://stats.bls.gov, and the MBA can be found at http://www.mortgagebankers.org.

Classes M-I-1, M-I-2, and M-I-3 of Residential Asset Securities Corp. series 2002-KS2 have been placed under review for possible downgrade by Moody's Investors Service.Moody's said the reason for the rating actions was that credit enhancement levels may be low given the projected losses on the underlying pools. The pool has seen losses in recent months, and future losses "could cause a more significant erosion of the overcollateralization," the rating agency said. The transaction is backed by fixed- and adjustable-rate subprime mortgage loans originated by Residential Funding Corp., which is also the master servicer on the deal.

Six tranches from GSAMP Trust 2004-SEA2 have been downgraded by Moody's Investors Service.The downgrades were as follows: class M-2, from A2 to Baa2; class M-3, from A3 to Baa3; class M-4, from Baa1 to Ba2; class M-5, from Baa2 to B1; class B-1, from Ba3 to B3; and class B-2, from Caa3 to C. The downgrades were based on "rapid deterioration" of overcollateralization and subordination caused by "an accelerating pace of losses," the rating agency said. The losses were attributed to a high frequency of defaulted loans and "substantial severity" of loss on liquidated collateral. The transaction was issued with seasoned subprime mortgage loans, some of which had experienced delinquency prior to securitization.

Despite real efforts by servicers of U.S. residential mortgage-backed securities, complying with the minimum servicing requirements of Regulation AB will "remain a challenge" in the first year of the law, according to a report by Fitch Ratings.Each party in the servicing function is required to provide, by March 31, 2007, both an assessment report on its compliance with Reg AB and an attestation report from a public accounting firm to concur with the servicer's assessment. More parties are now subject to reporting on "previously untested" Reg AB servicing criteria, which could cause delays and restatement of noncompliant servicer reports, according to Thomas Crowe, a Fitch director. "Many servicers are still developing the attestation programs for themselves and other relevant parties, and determining additional reporting requirements," Mr. Crowe said, adding that many are still consulting with accounting and law firms on the requirements. Fitch can be found online at website at http://www.fitchratings.com.