Fitch Ratings said late yesterday that it has downgraded AMC Mortgage Services, Inc.'s servicer ratings in light of operating difficulties at the subprime giant and growing concern over Citi's willingness to provide continued liquidity to the organization. The rating agency also said AMC was placed on Rating Watch Negative for possible additional downgrades. Fitch also said it had placed fellow subprime lender NovaStar Financial's servicer on Rating Watch Negative, expressing concern that emerging funding difficulties at the lender could present a threat to servicer stability. AMC takes a hit Fitch downgraded AMC's residential primary servicer rating for subprime product to 'RPS3+' from 'RPS2+', and also downgraded its residential special servicer rating to 'RSS3+' from 'RSS2+', it said in a press statement. According to the rating agency, its actions reflected "the challenging operating environment in the subprime mortgage market and the evolving nature of ACC's relationship with Citigroup." ACC Capital, AMC's parent, announced a deal with Citigroup on March 1 that provided the ailing company liquidity to continue operations. The deal also gave Citi a purchase option right to ACC Capital's warehouse lending operations. Fitch noted that ACC's financial flexibility had been constrained by significant legal settlement costs, asset quality challenges, which led to an elevated level of early payment default repurchases, and increasing delinquency levels, resulting in a significantly higher cost of servicing. Many of these challenges have been exacerbated by a sharp decline in origination volume and declining risk appetite among RMBS investors and liquidity providers. Although Citi has provided some interim liquidity, Fitch said it has doubts about Citi's willingness to provide explicit support going forward. Fitch also said it has rated 103 residential mortgage-backed securities (RMBS) transactions collateralized by mortgage loans originated by ACC subsidiaries. Of the 103 transactions, all but 16 transactions (issued under the Park Place Securities, Inc. shelf) are serviced by AMC. The servicer rating downgrade will not have a direct immediate effect on the ratings of the AMC serviced transactions, according to the rating agency. All transactions at least one year old have had rating actions within the last six months, with Fitch affirming the majority of outstanding tranches. NovaStar under scrutiny, too AMC isn't the only subprime lender being watched closely at Fitch, however, with the agency also saying yesterday that it has placed NovaStar Mortgage, Inc.'s 'RPS2-' residential primary servicer rating for subprime product on Rating Watch Negative. As a result of the company's recent challenges, Fitch said it feels that NovaStar's ability to fund its ongoing servicing operation and maintain servicing quality could come under pressure. NovaStar had reported in its recently-filed 10K with the Securities and Exchange Commission that the company may fail to satisfy the profitability covenant under one of its warehouse repurchase facilities if the company's GAAP net income, determined on a pre-tax basis, is not greater than $1 for the six months ended March 31, 2007. NovaStar said it is seeking a waiver of the covenant and is developing contingency plans should that waiver not be granted. All of NovaStar's warehouse repurchase credit facilities, however, contain cross-default provisions -- provisions that industry insiders have told HW led to the collapse at New Century. Should a waiver be obtained, NovaStar would still need to demonstrate a more stable funding profile to resolve the rating watch, Fitch said. For more information, please visit http://www.fitchratings.com.