ResCap’s Servicer Ratings Cut; “Weak” Financial Condition Cited

Fitch Ratings said Tuesday afternoon that it had cut its residential mortgage servicer ratings on troubled lender Residential Capital LLC, as the ratings agency said questions over the company’s “weakening financial condition” continue to run unanswered. Fitch cut all servicer ratings by at least four notches, a significant drop in ratings for one of the nation’s largest servicing shops.

Cut the deepest, at five notches, were the company’s special and master servicer ratings; both plunged from RSS2+/RMS2+ to RSS3-/RMS3-, respectively. A summary of all ratings actions is provided in the graphic below.

ResCap consolidated the disparate servicing operations of GMAC Mortgage, GMAC-RFC, and Homecomings Financial under its corporate umbrella earlier this year.

Housing Wire reported yesterday that ResCap subsidiary Residential Funding Corp.had agreed to transfer servicing of a number of subprime deals to Lehman Brothers (LEH: 0.00 N/A) outfit Aurora Loan Services, LLC; at the time, it wasn’t clear what had forced the transfer. While no party is commenting, sources suggested to HW that the pending downgrade of ResCap’s servicer ratings likely forced the transfer.

Most servicing contracts require servicers to maintain a minimum rating in order to continue to service securitized collateral; the downgrades by Fitch move many of ResCap’s servicer ratings below the common thresholds used, our sources confirmed.

“The servicer rating actions reflect the continued pressure on ResCap’s liquidity position and financial flexibility and the potential impact on the company’s servicing operations,” Fitch said in a press statement. “A company’s financial condition is an important component of Fitch’s servicer rating analysis.”

As of March 31, 2008, ResCap serviced 3.28 million loans for $458 billion, excluding real estate owned (REO) properties. The servicing portfolio was comprised of 55 percent prime, 26 percent second liens, 11 percent subprime, and 8 percent Alt-A products, Fitch said.

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