Fitch Warns on Option One Servicer Ratings

Fitch Ratings said today that it has placed Option One Mortgage Corporation’s ‘RPS1′ residential primary servicer rating for subprime product and its ‘RSS1′ residential special servicer on Rating Watch Negative.

From the press release:

The Watch Negative reflects the potential impact on Option One’s servicing platform of decreased loan originations, changes in credit lines, as well as uncertainties regarding the sale of the servicing platform. Although the 2006 announced sale by H&R Block of Option One has not yet been completed, on April 20, 2007, H&R Block announced that Option One’s servicing platform would be purchased by Cerberus Capital Management, LP, with the sale scheduled to be closed in the fourth quarter of 2007.

In light of the challenges facing the subprime market, including the increased cost of servicing defaulted subprime loans, as well as Option One’s transitioning from a publicly rated parent to an unrated non-public company, there are concerns regarding the company’s ability to sustain its operational capabilities. In Fitch’s experience, other servicing platforms that have been up for sale for an extended period of time have shown a potential for deterioration in operational capabilities due to loss of key employees, limited investment in technology and infrastructure, and reduction in training.

Yesterday I blogged about Option One’s decision to cease offering a 2/28 ARM to subprime borrowers, and earlier this month Option One also saw a $1.5 billion credit line with Lehman Brothers expire.

The move by Fitch will undoubtedly fuel the fire for those who had speculated that the Cerberus deal might be in some doubt, given Fitch’s assessment of “uncertainties regarding the sale of the servicing platform.”