Aurora Sees Servicer Ratings Dropped in Wake of Lehman’s BK

Following up on an earlier HW report addressing the future of Aurora Loan Services, the substantial servicing arm and once-large Alt-A origination platform tied to Lehman Brothers Holdings Inc. (LEH: 0.00 N/A), Fitch Ratings said earlier this week that it had cut its core servicer ratings on the Littleton, Colo.-based servicer.

All servicer ratings were affected, according to a press statement by Fitch: the agency cut Aurora’s residential primary servicer rating for Alt-A product downgraded to ‘RPS3+’ from ‘RPS2+’; its residential primary servicer rating for subprime product to ‘RPS3′ from ‘RPS2′; its special servicer rating to ‘RSS3′ from ‘RSS2′; residential master servicer rating downgraded to ‘RMS3+’ from ‘RMS1′.

The master servicer ratings cut is by far the most substantial and dramatic, a four-notch cut; all cuts move the servicer into territory that could potentially affect its ability to maintain servicing on some deals.

Fitch cited “concern regarding the potential impact on servicing operations of continued pressure on Aurora’s financial flexibility in the increasingly challenged residential mortgage market.”

According to statistics provided earlier by Fitch last year, 271,400 loans in the company’s servicing portfolio were Alt-A totaling $69.4 billion, while 13,500 subprime loans totaled $2.2 billion and a combination of 241,000 FHA, VA, conventional conforming, scratch and dent home equity, Alt-B, and non-guaranteed SBA loans totaled $41.1 billion. Beyond primary servicing, the company is the largest master servicer this side of Wells Fargo & Co. (WFC: 27.87 -1.59%), managing a master servicing portfolio of 1.04 million loans totaling $209 billion.

Earlier this week, company officials at Aurora moved to tell their attorneys to continue to work, after some told HW they were concerned about recouping advances.

“Legal matters referred to your offices for these subsidiaries should not be stayed or treated any differently at this time,” a letter obtained by HW and sent to attorneys that represent the company in mortgage-related matters earlier this week read. “We expect you to continue managing these matters in the ordinary course and not to delay any work needed to be performed.”

One attorney suggested the hesitance from attorneys representing the firm came from the bankruptcy of New Century Financial last year; that firm’s collapse saddled many attorneys with hundreds of thousands of dollars of losses on advances that were never recouped.

Disclosure: The author held no relevant positions when this story was published; even if he wanted to, he couldn’t, thanks to the SEC. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.