Mortgage bond servicers are showing improvements in managing challenged portfolios within a framework of tighter compliance and regulatory scrutiny, according to Fitch Ratings, but challenges remain.  

Fitch says in a client note that it is seeing costs of servicing continue to rise in concert with an increased compliance focus and enhanced regulatory scrutiny. 

“Higher regulatory capital requirements may become a factor too, especially for smaller servicers,” the note says. “Additionally, more capital may be required to be set aside as rates rise and mortgage servicing rights values increase. 

“Smaller servicers (many not rated by Fitch) may experience greater difficulty in the environment of rising costs and may begin to look to strategic alternatives,” the report says.

Current ratings and outlooks for servicers covered by Fitch are indicative of generally good performance and improved stability, the company says.

Fitch’s servicer review process provides a key indication of servicer performance, providing primary servicer ratings across the full spectrum of RMBS products, along with Master servicer, special servicer and small balance commercial servicer ratings. 

Fitch rates servicers on a scale of one to five, with one being the highest rating. Within some of these rating levels, Fitch further differentiates ratings by plus (+) and minus (-). 

Of the 89 individual servicer ratings covered within RMBS:

  • 9% within the level one range (1 or 1-);
  • 54% within level two (2+, 2 or 2-);
  • 29% within level  three (3+, 3 or 3-);
  • 8% currently at level four.

No servicers carry a five rating.