Subprime Lending

First NLC Subprime Tranches Downgraded May 13, 2008

Seven tranches from two First NLC Trust 2005 subprime transactions have been downgraded by Moody's Investors Service. The downgrades were as follows: First NLC Trust 2005-1, class M-12, from Baa2 to Ba1, and class M-13, from Baa3 to B1; and First NLC Trust 2005-2, class M-5, from A2 to Baa1, class M-6, from A3 to Baa2, class M-7, from Baa1 to Ba1, class M-8, from Baa2 to Ba3, and class M-9, from Baa3 to B2. Moody's attributed the downgrades to "an increasing proportion of severely delinquent loans." The collateral consists primarily of first-lien subprime mortgage loans.

1Q Home Price Decline Steepest in 26 Years May 13, 2008

Prices paid for single-family homes fell 7.7% in the first quarter from the level of a year earlier, the steepest decline ever recorded by the National Association of Realtors, which has been tracking sales for 26 years. The trade group did offer one piece of good news (if it can be deemed such): 48 out of 149 metropolitan statistical areas tracked (or 32.2%) showed higher median prices in the quarter. In the first quarter, the average median sales price was $196,300, compared with $212,600 a year earlier. The NAR reported that there were "very few jumbo loan originations" in the quarter, "so sales are much slower in high-cost areas." Lawrence Yun, chief economist for the trade group, added that, "Neighborhoods with little subprime exposure are holding on very well." According to preliminary figures compiled by National Mortgage News and the Quarterly Data Report, mortgage bankers funded less than $4 billion worth of subprime loans in the first quarter. The NAR can be found online at http://www.realtor.org.

Feds Shut Arkansas Bank May 12, 2008

Federal banking regulators have closed ANB Financial after finding that the Bentonville, Ark., national bank was undercapitalized and likely to fail. The $1.9 billion-asset bank reported a $59 million loss in the fourth quarter, with nearly $400 million in noncurrent loans. Its parent, ANB Bancshares, closed its wholesale subprime lending business in March. The Federal Deposit Insurance Corp. arranged for Pulaski Bank and Trust Co., Little Rock, Ark., to take over the national bank's nine offices, along with $212.9 million in insured deposits and $39.2 million in uninsured deposits. The Little Rock bank also agreed to purchase $235.9 million of the failed bank's assets.

HSBC Taking $3.2B in 1Q Mortgage Hits May 12, 2008

HSBC Holdings says it will take $3.2 billion worth of mortgage impairment charges in the first quarter, adding that the "deterioration in the U.S. housing market will extend into 2009." At March 31, 12.5% of its U.S subprime portfolio was 60-days or more delinquent, compared with 11.2% at the end of December. In the same quarter last year HSBC took $1.6 billion in mortgage charges, and in the fourth quarter it suffered $4.6 billion in writedowns. The London-based bank is still smarting from its foray into America's subprime market, which commenced in 2003 when it paid $14 billion for Household Finance, then one of the nation's largest subprime lenders and servicers. Over the past year, HSBC has closed all third-party lending channels that were once part of Household. Even though HSBC continues to take writedowns on its residential holdings, it reported that the "vast majority of our mortgage customers continue to meet their commitments."

Fitch Eyes Countrywide Pass-Thrus May 9, 2008

Classes B-3 and B-4 of Countrywide mortgage pass-through certificates series 2003-44 have been placed on Rating Watch Negative by Fitch Ratings. Fitch also removed class A-3 of the deal and class 1-A-2 of series 2003-1 from Rating Watch Negative and affirmed the ratings on 32 classes in the two transactions. The collateral consists of mixed-term fixed-rate prime mortgages.

FHA Introducing Risk-Based Pricing May 9, 2008

The Federal Housing Administration will start charging upfront mortgage insurance premiums based on the borrower's credit score and downpayment starting July 14, according to the Department of Housing and Urban Development. Upfront premiums paid at closing will range from 1.25% to 2.25% under the new pricing schedule that will apply to all FHA loans. Currently all FHA borrowers pay a 1.5% upfront premium regardless of risk. By charging slightly higher premiums based on credit risk, HUD expects to create a more financially sound FHA program and reach more borrowers struggling to keep up with their payments on high-cost subprime mortgages. Risk-based pricing will also be used for refinancing delinquent borrowers under the FHA Secure program starting in July. HUD is expanding the FHA Secure program so that borrowers who have missed two or three payments in the previous 12 months can be refinanced into FHA-insured mortgages. The risk-based pricing notice and a mortgagee letter with the underwriting standards for the expanded FHA Secure program are posted on the FHA website, which can be found at http://www.fha.gov.

AIG Takes $7.8B Housing-Linked Loss May 9, 2008

American International Group Inc., New York, has reported a net loss of $7.81 billion in the first quarter, and its United Guaranty mortgage insurance subsidiary took an operating loss of $352 million due to housing and capital market disruptions. Analysts at Fitch Ratings, which downgraded AIG's issuer default and senior debt ratings from AA to AA-minus in response to the earnings results, said they believe AIG was primarily exposed to housing finance-related risks through $61 billion of structured finance collateralized debt obligations backed mainly by subprime U.S. residential mortgage-backed securities in its $469 billion portfolio of notional credit derivatives. AIG said the operating loss in its MI unit reflected "increased losses incurred in both the domestic first- and second-lien businesses" and occurred despite a 14.3% jump (from the level recorded a year earlier) in domestic first-lien net premiums written during the quarter. AIG also announced the commencement of offerings of common stock and equity units totaling $7.5 billion. If the company completes the capital raise successfully, Fitch said it plans to remove AIG's ratings from Rating Watch Negative and affirm them with a negative outlook. Fitch plans to lower AIG's ratings by one notch if the capital raise is not successful.

Morgan Stanley B&C Pass-Thru Downgraded May 8, 2008

Class B-2 of Morgan Stanley mortgage pass-through certificates series 2002-AM3 has been downgraded from CC/DR2 to C/DR4 by Fitch Ratings. Fitch also affirmed the ratings on five other classes in the transaction and removed class A-2 from Rating Watch Negative. The collateral consists of fixed- and adjustable-rate subprime mortgages.

Fitch Downgrades Subprime-Backed CDOs May 8, 2008

Fitch Ratings has downgraded 30 classes of notes from eight collateralized debt obligations backed primarily or partly by subprime residential mortgage-backed securities. The affected securities are: seven classes issued by Jupiter High-Grade CDO III Ltd.; five classes issued by Davis Square Funding III Ltd.; four classes issued by Pacific Bay CDO Ltd.; four classes issued by South Coast Funding II Ltd.; three classes issued by South Coast Funding VI Ltd.; three classes issued by Grenadier Funding Ltd.; three classes issued by Davis Square Funding II Inc.; and one class issued by Millstone Funding Ltd. Fitch attributed the downgrades to "significant collateral deterioration" in the portfolios' subprime RMBS and, in some cases, alternative-A RMBS, commercial MBS, prime MBS, and structured finance CDOs with underlying exposure to subprime RMBS.

3 MSR Deals Out for Bids May 8, 2008

Three large portfolios of mortgage servicing rights have just been put out for bidding. Interactive Mortgage Advisors, Denver, is selling servicing rights on a $5.5 billion portfolio of subprime mortgage loans. The two-part offering includes both primary and master servicing rights on the portfolio. The portfolio has an average loan size of $160,686; an average weighted interest rate of 8.523%; an average weighted servicing fee of 45.3 basis points; and a total 30-day-plus delinquency rate of 19.6%. Bids are due May 28. Separately, IMA is also taking master and primary servicing bids on alternative-A and subprime deals involving $5.0 billion and $3.9 billion, respectively. The portfolios have similar characteristics to the previous one. Bids are due May 28. Also separately, the Prestwick Mortgage Group, Alexandria, Va., is brokering the sale of monthly flow servicing rights on an estimated $5 million per month of Fannie Mae loans. The seller desires to start deliveries in July. Bids are due May 21.

Subprime Lending

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