In another casualty of the Lehman Brothers failure, Fitch Ratings downgraded and placed on rating watch negative the servicer ratings of Capstone Mortgage Services, a subsidiary of Lehman Brothers Holdings and the U.K. servicer to the Eurosail, Preferred Residential, Southern Pacific, MARS 4, EMF-UK 2008-1 and Mortgage Funding 2008-1 transactions.

Fitch said it is concerned about Capstone’s ability to administer and manage residential mortgage loans even though the servicer is not currently in administration. Fitch also noted that back-up servicers Homeloan Management and Scarborough Mortgage Servicers are monitoring the situation.

The agency downgraded Capstone's U.K. residential mortgage primary and special servicer ratings to 'RPS3+(prime)UK', 'RPS3+(subprime)UK' and 'RSS3+UK' from 'RPS2+(prime)UK', 'RPS2+(subprime)UK' and 'RSS2+UK', respectively. The ratings are placed on Rating Watch Negative (RWN).

The RWN indicates that Fitch may either downgrade or affirm Capstone's servicer ratings depending on the stability of the servicing portfolio, operational capabilities and financial condition. RWN is expected to be resolved once more information is received regarding Capstone's future, particularly whether the company is placed into administration, if at all, and once Capstone can illustrate continuity and stability of its operation, in light of its current situation.

Fitch also noted that an acquisition of Capstone by a financially strong and/or investment-grade rated company could further mitigate concerns surrounding Capstone's long-term viability.

As of May 2008, Capstone was named primary and special servicer on almost 99,000 loans, totalling GBP8.34 billion. A further GBP1.2 billion representing 16,915 loans were sub-serviced on behalf of Capstone by third-party servicers.

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