Fitch Ratings said today that it has dropped its servicer ratings on troubled subprime mortgage outfit Option One Mortgage Company, whose pending sale to private equity investor Cerberus Capital is in serious doubt. Option One saw both its primary servicer ratings for prime and special products dropped to ‘RPS2+’ from ‘RPS1,’ Fitch said. The downgrade brings both ratings down two notches — a significant move and not commonly observed (most downgrades are one notch). Fitch futher noted that Option One remains on negative ratings watch for further downgrades. From the press release:

Since Fitch’s prior review, Option One’s servicing manager departed and was replaced by the former servicing manager, who ran the servicing operation for a number of years. The company continues to make reductions to its current servicing staffing levels through attrition and leveraging offshore and domestic vendors. Option One continues to outsource back office functions to its offshore vendors and captive sites in an effort to further reduce costs. The company also outsourced several customer contact functions, including portions of loss mitigation and collection efforts. However, management recently determined that several of these customer facing functions, specifically loss mitigation are best handled by domestic associates who are more familiar with the current market conditions and issues surrounding loss mitigation, foreclosures and bankruptcies. As a result, the majority of loss mitigation and late stage collections are performed onshore in one of Option One’s site. Historically, Option One’s special servicer rating was based on its ability to service its own defaulted loans. However, the company recently expanded its special servicing capabilities to service defaulted loans for other companies.

It’s extremely interesting to see the reversal in offshoring here; offshoring has been perhaps the single biggest trend in loan servicing in the past decade. And it’s been the single biggest lightning rod for industry criticism, too. (In particular, Ocwen — who has a large VA servicing contract with the government — is a big proponent of offshoring, and many in the industry have wondered aloud about the wisdom of our own government using U.S. taxpayer’s dollars to essentially push jobs overseas. The counter to this, of course, is that offshoring increases efficiency — making it less costly to service VA loans, which would ostensibly help VA borrowers.)