Subprime Servicer Ratings May Fall

Moody’s Investors Service announced on Wednesday that it has placed on review for a possible downgrade the servicer quality ratings of Specialized Loan Servicing LLC, Accredited Home Lenders Inc., New Century Mortgage Corp., NovaStar Mortgage Inc., and AMC Mortgage Services — better known as Ameriquest.

The reviews are “prompted by the heightened level of volatility in the Alt-A and subprime mortgage markets.,” Moody’s said.

The companies, or their parents, “like a number of other independent mortgage finance companies, [are] facing lower profitability as well as potentially an increased level of liquidity risk given current market conditions,” the ratings agency continued. While they have currently maintained servicing performance, Moody’s believes that such financial pressure could impact each company’s ability and willingness to continue to invest and maintain current resource levels in their servicing platforms in the future.

Additionally, the stability of the companies’ servicing operations may also impact residential mortgage-backed securities backed in whole or in part by loans serviced by them, Moody’s added. Although it is too soon to determine which specific transactions may be affected, the level of impact will depend primarily upon the proportion of loans serviced by these entities as well as the performance of such loans.

The most likely downside scenario for Specialized’s current ratings of SQ3 as a primary servicer of subprime mortgages and SQ3 as a primary servicer of second lien mortgages would be a change to SQ3- for the servicing of both types of loans. The Terwin Holdings LLC subsidiary’s current ratings are based on average collection abilities, average loss mitigation results, average foreclosure and REO timeline management and below average servicing stability.

Moody’s said the SQ ratings represent its view of a servicer’s ability to prevent or mitigate asset pool losses across changing markets. The ratings range from SQ1, which is strong, to SQ5, and, where appropriate, a “+” or “-” modifier is appended to indicate a servicer’s relative servicing quality within a particular category.

Accredited is currently rated SQ2 as a primary servicer of subprime mortgage loans due to above average collection ability, average loss mitigation results, strong foreclosure and REO timeline management and average servicing stability, according to an announcement. The most likely downside scenario would be a reduction in the servicing stability assessment to below average, with a corresponding change in the primary servicer rating to SQ2-.

New Century’s ratings of SQ3+ as a primary servicer of subprime mortgage loans could be downgraded to SQ3 through a reduction in its servicing stability assessment from average to below average, Moody’s reported. In addition to average servicing stability, New Century currently has average collection abilities, average loss mitigation results, and above average foreclosure and REO timeline management.

NovaStar has ratings of SQ2 as a primary servicer of subprime mortgage loans due to strong collection abilities, above average loss mitigation results, strong foreclosure and REO timeline management and average servicing stability, Moody’s reported. As with the previous two lenders, a change in stability to below average would result in a ratings change for the real estate investment trust to SQ2-.

On Wednesday, NovaStar announced a fourth quarter net loss of $14.4 million and full-year 2006 net income of $66.3 million — about half off the previous year’s earnings.

“During the period 2007 through 2011, we expect to recognize little, if any, taxable income,” NovaStar, which said it is debating whether it would maintain its REIT status, said in the press release. Later that day, it issued an announcement clarifying its outlook.

“Our comments about 2007 to 2011 related to taxable income, as part of our discussion of a potential change in NovaStar’s REIT status,” the company said.

“Our belief is that NovaStar generally will be profitable on a GAAP basis over the next several years, as it was in 2006,” the statement said. “Because of the REIT structure and accounting rules for securitizations, taxable income exceeded GAAP earnings in recent years, and we expect taxable income to be less than GAAP earnings over the next several years.

Ameriquest is rated SQ2+ as a primary servicer of subprime mortgage loans and SQ2+ as a special servicer of mortgage loans, based on strong collection abilities, above average loss mitigation results, strong foreclosure and REO timeline management, and average servicing stability. The most likely downside scenario would most likely be a stability assessment change to below average and a corresponding change to SQ2 in both ratings.

However, Moody’s noted that Ameriquest is currently in discussions with third parties to either invest in or acquire the company and that the ultimate outcome of such discussions may positively impact the servicing stability of the company.

But the news wasn’t all bad for servicers.

Freddie Mac announced Thursday 39 single-family mortgage servicers achieved Tier One Platinum or Tier One Gold performance rankings for superior investor reporting and default management during 2006. Among the Platinum servicers were mega-servicers Wells Fargo Home Mortgage, Countrywide Home Loans Inc. and Washington Mutual. Hoosier Hills Credit Union was recognized for making the list two years in a row.