Ocwen-related RMBS deals were just hit with major downgrade

Fitch follows through on threat to downgrade Ocwen deals

Less than a month ago, Fitch Ratings sounded 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.

And Friday, Fitch followed through on its threat and downgraded hundreds of RMBS classes because they contained Ocwen-serviced loans.

Fitch previously placed 297 RMBS classes from 135 separate transactions on “negative rating watch,” due to the presence of Ocwen-serviced loans in the transactions.

Fitch announced Friday that it resolved the rating watch on 280 of the 297 RMBS classes from 127 of the original 135 transactions, and the results aren’t good for investors.

According to Fitch, it downgraded 273 of the 280 classes to a rating level of “Asf.” Previously, all of the classes were rated above “Asf.”

The remaining seven classes were affirmed at “AAAsf.” All the affected classes were assigned a “stable” outlook.

“The rating action reflects the increased risk of a temporary servicer disruption,” Fitch said. “The small number of affirmed classes are expected to pay off in full imminently. The short projected time until payoff mitigates potential servicer disruption risk.”

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

Fitch said that it has applied rating constraints to Ocwen-serviced RMBS deals since 2012 due to the “unique risks” that stem from Ocwen’s rapid growth. But up until now, those constraints were focused on subprime loans, where Ocwen’s market share is the largest.

“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,” Fitch said.

“Today's rating actions expand the constraints to all mortgage sectors, reflecting Ocwen's growth in the Prime and Alt-A sectors,” Fitch continued. “While Fitch previously allowed some Ocwen-serviced subprime RMBS to be rated above 'Asf' if the class was expected to pay off in full within one year, going forward the rating constraints will now apply to all classes.”

Fitch said that all 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 downgrade of the RMBS ratings. 

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