Moody's Investors Service said late Wednesday that it had placed five of the nation's largest subprime servicers -- Ameriquest, Specialized Loan Servicing, New Century, Accredited, and NovaStar -- on review for a possible servicer ratings downgrade. According to a review of past ratings actions at Moody's, the move likely represents the first time the agency has simultaneously placed several large lenders on a ratings review. Moody's cited increasing risks to liquidity at each company as the driving factor behind its decision to review the ratings of each servicer. In addition to citing ongoing troubles in the subprime credit sector, the rating agency also acknowledged increasing volatility in the Alt-A mortgage market as well. The Alt-A credit sector has largely been spared the recent troubles impacting subprime, although many have speculated regarding a so-called "spill-over effect." Calls to Moody's seeking clarification regarding its remarks on the Alt-A market were not returned by HW's publishing deadline.
Many of the at-risk servicing shops have made headlines in recent weeks, as the subprime lending industry faces its most recent crisis. New Century recently said that it will restate 2006 earnings due to surging repurchases, triggering a free-fall in the company's stock and a growing slate of allegations of securities fraud, while both Accredited and NovaStar reported quarterly losses reaching tens of millions of dollars. Ameriquest has been rumored to be in negotiations with Citi regarding the possible sale of the mortgage banking giant. Servicing stability in question A downgraded assessment of servicing stability is the potential outcome of the ratings reviews, Moody's said, which would in turn lower each company's servicer quality ratings. Servicer stability is one component of the overall servicer quality (SQ) assessment Moody's provides. The company's SQ ratings help determine the cost of funds for many servicing operations, since a lower rating requires securitized pools to utilize a greater amount of credit enhancement to cover servicer-driven losses. Several industry insiders told Housing Wire that the the ratings review, should it lead to lowered ratings, could represent an additional source of friction for the impacted lenders. "For Moodys to take this action, first of all, there is clearly something they're seeing in the metrics they track," said one source, on condition of anonymity. "These guys [Moody's] have built a business out of being almost too conservative." Another source expressed concern. "New Century, for one, is already getting hammered with repurchases and loan impairment charges," said the source, who also spoke with Housing Wire on the condition that her name not be used. "If it costs them more to securitize their loans, that's even less cash coming in, and investors are already demanding higher coupons. It'd be a liquidity crisis feeding a liquidity crisis." The stability of each company's servicing operations may also impact residential mortgage-backed securities (RMBS) backed in whole or in part by loans serviced by each company. Although Moody's said it is too soon to determine which specific transactions may be affected, the level of impact will depend primarily upon the proportion of loans serviced by each company as well as the performance of any affected loans. For more information, visit http://www.moodys.com.
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