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Fitch warns Ocwen-related RMBS deals face major downgrade

Placed on “Rating Watch Negative”

Fitch Ratings is sounding the alarm on residential mortgage-backed securities that contain loans serviced by Ocwen Loan Servicing, an affiliate of Ocwen Financial (OCN), telling investors to expect a downgrade on the ratings of Ocwen-related RMBS transactions soon.

Fitch announced that is placing 297 RMBS classes from 135 transactions on “Rating Watch Negative,” due to the presence of Ocwen-serviced loans in the transactions. Currently, Fitch rates all of the classes above “Asf.” 

According to Fitch, the rating watch is expected to be resolved within 30 days of an ongoing assessment of Ocwen's servicing operations, at which point Fitch expects to downgrade most of the affected classes to “Asf.” Fitch said that the expected rating downgrade reflects the increased risk of a temporary servicer disruption.

Fitch cites Ocwen’s rapid expansion and regulatory troubles as additional reasons for the expected downgrade.

Fitch said that it has applied rating constraints to Ocwen-serviced RMBS deals since 2012 due to the unique risks stemming from the rapid growth of the company's servicing portfolio.

“To date, Fitch's rating constraints have focused primarily on subprime RMBS, where Ocwen's market share is largest,” Fitch said in the note. “The size of the portfolio and the increased cost and heightened regulatory requirements of servicing subprime loans in particular limits the number of companies willing and able to quickly assume the servicing rights in the event a servicing transfer is required. Today's rating actions anticipate expanding the constraints to all mortgage sectors, reflecting Ocwen's growth in the Prime and Alt-A sectors.”

Fitch adds that it previously allowed some Ocwen-serviced subprime RMBS deals to be rated above “Asf” if the class was expected to payoff in full within one year. But now, the rating constraints will now likely apply to all classes, regardless of time to payoff.

In October, Fitch announced that it was placing all the U.S. residential mortgage servicer ratings for Ocwen Loan Servicing on “Rating Watch Negative.”

According to Fitch, it now lists Ocwen’s servicer ratings as follows:

  • Residential primary servicer rating for Prime product at 'RPS3'
  • Residential primary servicer rating for Alt-A product at 'RPS3'
  • Residential primary servicer rating for Subprime product at 'RPS3'
  • Residential primary servicer rating for HELOC product at 'RPS3'
  • Residential primary servicer rating for Closed-end Second Lien product at 'RPS3'
  • Residential special servicer rating at 'RSS3'
  • Residential master servicer rating at 'RMS3’

Fitch said that all of those ratings and the totality of Ocwen’s recent regulatory troubles, including Ocwen’s recent settlement with California over Ocwen’s reluctance to provide documentation proving that it could operate in the state and the recent legal threats by mortgage bond investors, who claimed that Ocwen failed in its duties as a mortgage servicer, into consideration for the potential downgrade of the RMBS ratings. 

"Fitch is currently conducting an assessment of Ocwen's servicing operations," Fitch said in the report. "The ratings of the RMBS included in today's action will be influenced by Fitch's opinion of Ocwen's ability as a primary servicer, as reflected by Fitch's servicer and Issuer Default ratings."

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