Fitch Downgrades Operational Risk Ratings of Several U.S. RMBS Servicers

NEW YORK--()--Fitch Ratings has downgraded the operational risk ratings of several U.S. residential mortgage servicers. Reasons for the rating downgrades include the growing burden of managing delinquent and defaulted mortgages in an environment of heightened regulatory scrutiny. Also factored into the downgrades were the increased areas of risk identified by various regulatory bodies which ultimately resulted in consent decrees, and the slower than expected pace that institutions have demonstrated in responding to the foreclosure crisis and implementing process changes.

Other factors as discussed in greater detail below. These rating actions follow Fitch's November 2010 assignment of a Negative Outlook to the U.S. residential mortgage servicer sector.

In Fitch's view, the largest bank-related mortgage servicers are most acutely impacted by these increasing operational risks. Therefore, Fitch has downgraded the servicer ratings of Bank of America, Chase, CitiMortgage, and Wells Fargo by one to two notches. In addition, the operational risk ratings of MetLife, PNC and Suntrust were negatively affected, albeit to a somewhat lesser degree. Following the completion of its full annual review of all rated servicers (later in 2011), Fitch may downgrade the affected ratings, as well as for servicers not subject to this initial ratings adjustment.

The Negative Outlook for the U.S. Residential Mortgage Servicer ratings sector was initially based on increased concerns surrounding procedural defects in the judicial foreclosure process. Since then, other process and risk management concerns have continued to arise, which included bank regulator's consent orders issued to several of the largest servicing companies in Fitch's RMBS servicer rating universe.

In light of these concerns, Fitch adjusted the weightings for various scored factors within its RMBS servicer ratings program to reflect the increased risks and deficiencies identified in the specific performance areas. Deterioration in risk management, staffing levels, quality control and in servicing defaulted loans scores were the major drivers of the downgrades.

Specifically, weights were adjusted to reflect the following as applicable:

--Lower credit for financial condition, and more weight applied to the company's willingness to extend available funds to improve operations in areas of risk management, staffing levels and training, quality control/audit and technology;

--Additional risk attributed to internal control/audit functions unless inclusive of all servicing processes and conducted at least annually, with direct senior management accountability for results and corrective actions;

--Removal of any credit given to a regulated bank's compliance programs, which were previously believed to have been subject to additional oversight for comprehensive risk management than is now apparent;

--Additional risk given to extensive use of offshore vendors or affiliates for borrower contact, with higher expected levels of oversight, control and comparison to performance available from other sources, including onshore providers;

--Additional risk and lower credit for management oversight for companies found to have mishandled loans subject to SCRA military special handling;

--Materially higher risk attributed to staffing level concerns within all default areas, but particularly in loss mitigation and foreclosure;

--Additional risk evidenced by corrective actions that needed to be taken within default processes, specifically foreclosure areas;.

--Additional weighting for the cost of potential regulatory actions, fines and penalties, as well as litigation and reputational risk.

In late 2010, the procedural defects in many servicers' foreclosure actions further stalled the foreclosure process. The foreclosure affidavit process and data accuracy concerns caused many servicers, including all large servicers, to halt a substantial amount of their foreclosure actions in both judicial and non-judicial states. The full extent of the concerns resulting from this and other related functions within servicer operations is far from resolved. Fitch expects that the additional scrutiny from a wide range of interested parties, as well as the potential new regulation and heightened risk from litigation, will result in continued reluctance to proceed with foreclosure.

This scenario is likely even if other efforts have been exhausted, further extending the overall time to resolve many of the loans and increasing the cost and market value loss for these properties, and, thus, the loss severity to investors. Fitch has already incorporated the increase in resolution times and loss severities into its ratings analysis of outstanding rated RMBS bonds. Consequently, Fitch does not expect any ratings impact of today's servicer rating changes outstanding RMBS bond ratings.

Fitch has downgraded the following U.S. residential servicer ratings:

BAC Home Loans Servicing LP:

--RMBS primary servicer rating for Prime product to 'RPS2' from 'RPS1-';

--RMBS primary servicer rating for Alt-A product to 'RPS2' from 'RPS2+';

--RMBS primary servicer rating for Subprime product to 'RPS2' from 'RPS2+';

--RMBS primary servicer rating for HELOC product to 'RPS2' from 'RPS2+';

--RMBS primary servicer rating for closed-end seconds to 'RPS2' from 'RPS2+';

--RMBS special servicer rating to 'RSS2' from 'RSS2+'.

Bank of America, NA:

--RMBS primary servicer rating for Prime product to 'RPS2' from 'RPS1-';

--RMBS primary servicer rating for Alt-A product to 'RPS2' from 'RPS2+';

--RMBS primary servicer rating for HELOC product to 'RPS2' from 'RPS2+'.

Chase Home Finance LLC:

--RMBS primary servicer rating for Prime product to 'RPS2+' from 'RPS1';

--RMBS primary servicer rating for Alt-A product to 'RPS2+' from 'RPS1';

--RMBS primary servicer rating for Subprime product to 'RPS2+' from 'RPS1';

--RMBS primary servicer rating for HELOC product to 'RPS2+' from 'RPS1';

--RMBS special servicer to 'RSS2+' from 'RSS1'.

CitiMortgage, Inc.:

-- RMBS primary servicer rating for prime product to 'RPS2+' from 'RPS1';

-- RMBS primary servicer rating for Alt-A product to 'RPS2+' from 'RPS1';

-- RMBS primary servicer rating for subprime product to 'RPS2+' from 'RPS1-'.

MetLife Bank, NA

--RMBS primary servicer rating for Prime product to 'RPS2-' from 'RPS2';

--RMBS primary servicer rating for Alt-A product to 'RPS2-' from 'RPS2'.

PNC Bank, NA

--RMBS primary servicer rating for Prime product to 'RPS2' from 'RPS2+';

--RMBS primary servicer rating for Alt-A product to 'RPS2' from 'RPS2+'.

Suntrust Mortgage Inc.

--RMBS primary servicer rating for Prime product to 'RPS2' from 'RPS2+'.

Wells Fargo Home Equity Group, (WFHE) a division of Wells Fargo Bank, N.A.:

-- RMBS primary servicer rating for home equity line of credit (HELOC) to 'RPS2+' from 'RPS1-';

-- RMBS Primary servicer rating for second lien product to 'RPS2+' from 'RPS1-'.

Wells Fargo Home Mortgage (WFHM), a division of Wells Fargo Bank, N.A.:

--RMBS primary servicer rating for Prime product to 'RPS1-' from 'RPS1';

--RMBS primary servicer rating for Alt-A product to 'RPS1-' from 'RPS1';

--RMBS primary servicer rating for Subprime product to 'RPS1-' from 'RPS1'.

Fitch rates residential mortgage primary, master, and special servicers on a scale of 1 to 5, with 1 being the highest rating. Within some of these rating levels, Fitch further differentiates ratings by plus (+) and minus (-) as well as the flat rating. For more information on Fitch's residential servicer rating program, please see Fitch's report "U.S. Residential and Small Balance Commercial Mortgage Servicer Rating Criteria," dated Jan. 31, 2011, and "Global Rating Criteria for Structured Finance Servicers," dated Aug. 16, 2010, both available on the Fitch's Web site at www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'U.S. Residential and Small Balance Commercial Mortgage Servicer Rating Criteria' (Jan. 31, 2011);

--'Global Rating Criteria for Structured Finance Servicers' (Aug. 16, 2010).

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Contacts

Fitch Ratings
Committee Chairperson:
Diane Pendley, +-1212-908-0777
Managing Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Primary Analysts:
Thomas Crowe, +1-212-908-0227
Senior Director
or
Stephanie Whited, +1-562-594-5540
Director
or
Michael Laidlaw, +1-212-908-0251
Director
or
Shashi Srikantan, +1-212-908-0393
Director
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

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Contacts

Fitch Ratings
Committee Chairperson:
Diane Pendley, +-1212-908-0777
Managing Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Primary Analysts:
Thomas Crowe, +1-212-908-0227
Senior Director
or
Stephanie Whited, +1-562-594-5540
Director
or
Michael Laidlaw, +1-212-908-0251
Director
or
Shashi Srikantan, +1-212-908-0393
Director
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com