Fitch Downgrades Fremont’s Servicer Ratings; Troubles Continue

Fitch Ratings said late Tuesday that it had downgraded Fremont Investment & Loan’s (FIL) residential primary servicer rating for subprime product to ‘RPS4′ from ‘RPS3+’, and placed the rating on Watch Negative.

The rating action reflects the recent regulatory filing disclosing that Fremont General Corp. (NYSE:FMT), FIL, and FMT’s wholly owned subsidiary, Fremont General Credit Corp. (FGCC) will enter into a formal cease and desist order (C&D) with the Federal Deposit Insurance Corp.

This development, the latest in a series of events that has had an adverse impact on FIL’s credit profile, and has resulted in Fitch downgrading FIL’s long-term Issuer Default Rating (IDR) to ‘CCC’ from ‘BB-,’ as reported by Housing Wire on March 5.

Fitch said it believes that FIL’s financial flexibility is constrained by the FDIC order, as it requires FIL to maintain Tier I capital of at least 14 percent and places some restrictions on the company’s commercial real estate lending business. The servicer rating action reflects Fitch’s concern that FIL will face difficulty in funding its ongoing servicing operations, maintaining its servicing quality, and attracting third-party servicing opportunities.

An ‘RPS4′ rated servicer may not be acceptable for new residential mortgage-backed security (RMBS) transactions unless additional support or structural features are incorporated, Fitch said in a press statement. The Rating Watch Negative indicates that further downgrades are possible, Fitch said, depending upon the stability of the servicer’s portfolio and financial condition.

Fitch has rated 40 RMBS transactions collateralized by FIL-originated subprime mortgage loans. Of the 40 transactions, 11 are serviced by FIL, while ten of the 11 FIL-serviced transactions are master serviced by Wells Fargo Bank, N.A. The servicer rating downgrade will not have a direct immediate impact on the ratings of the FIL-serviced transactions, Fitch said.

Fitch Ratings rates residential mortgage primary, master, and special servicers on a scale of 1 to 5, with 1 being the highest rating. Within some of these rating levels, Fitch further differentiates ratings by plus (+) and minus (-) as well as the flat rating.

For more information, visit http://www.fitchratings.com.