Moody’s Investors Service said today that it has downgraded all servicer quality ratings for Homecomings Financial, amid a debt downgrade of the servicer’s parent, Residential Capital, LLC. The ratings actions included a drop in prime, HLTV, and second lien servicing to “SQ2+” from “SQ1” — a two notch drop in rating — as well as a drop in subprime and special servicing ratings to “SQ2” from “SQ2+.” From the press release:

The above rating actions are prompted by Moody’s downgrade of ResCap’s senior unsecured debt rating to Ba1 from Baa3 on August 16th, due to “continued, significant funding and valuation volatility in the single-family mortgage market, coupled with ResCap’s challenges in restructuring its residential financial group, as well as an adverse business environment that could create further profit pressure at the firm.” … Moody’s believes that the change in the company’s financial condition to non-investment grade as well as in its strategic direction may affect the company’s ability to continue its high level of investment in the servicing platform thereby, potentially impacting servicer quality in the future.

I’ve noted this in previous posts, but downgrades in servicer ratings like this can be a big deal for the operations in question. Servicing is a low margin business, and ratings downgrades like this essentially do two things: first, they serve to make the servicer more expensive to an issuer — a lower rating for a servicer usually means more overcollateralization to cover potential losses, eating into potential securitization profits. Secondly, and probably more relevant in the context of the current market environment, downgrades can cause a servicer to breach terms of servicing contracts it may have, many of which specify that a servicer maintain a certain level of rating. In this case, the downgrades didn’t move Homecomings into what would appear to be any sort of danger zone — ut futher downgrades would likely be a cause for some concern.