Fitch Ratings unleashed a slew of servicer ratings actions today, led by the downgrade of troubled subprime shop NovaStar:

Though NFI’s recent agreement with Wachovia for additional funding facilities may relieve the company’s short term liquidity pressure and afford NFI additional time to seek strategic alternatives, the rating actions reflect challenges that still face the company in funding its ongoing servicing operations and maintaining its servicing quality in an increasingly challenging subprime mortgage environment. Fitch will continue to monitor Novastar’s financial condition and ability to maintain long term stable funding and its impact on loan servicing and operational capabilities, as well as the company’s ability to maintain performance in a rising delinquency environment.

Also interesting is that NovaStar is beefing up its default and REO management operations, not surprising given the surge in defaults that has beset most subprime loan servicers in the current mortgage environment. Fitch also upgraded Select Portfolio today as well, showing that not all subprime servicers are in trouble. The Credit Suisse-backed operation is a hidden giant in the servicing industry:

SPS specializes in the servicing and resolution of subprime, Alt-A, home equity, and non-performing residential loans. As of Dec. 31, 2006, SPS’ servicing portfolio consisted of over 249,000 loans totaling $26.5 billion, an increase from $236,500 loans totaling $23.8 billion at Dec. 31, 2005. The servicing portfolio was comprised of $19.9 billion of subprime product, $3.8 billion of Alt-A product, and $2.8 billion of HE/HELOC product.

Fitch also affirmed Merrill Lynch’s servicing operation , Wilshire Credit – at least for Alt-A servicing. It’s not exactly a small player, either:

WCC has grown significantly since its acquisition by Merrill Lynch in 2004 and in 2006 increased its portfolio by 24%. As of Dec. 31, 2006, WCC serviced over 260,000 loans totaling more than $31.8 billion. WCC’s portfolio consists of $737 million of Alt-A product, $16 billion subprime loans, $9.2 billion in non-prime loans, and $5.6 billion in closed end home equity loans. The remaining portfolio consists of manufactured housing and FHA/VA products.