“IT’S NOT SOMETHING THAT’S TOTALLY UNEXPECTED” – MOODY’S DOWNGRADES BofA SERVICING

In the continuing question of why anyone would want to manage the servicing of mortgage loans in this day and age, Moody’s took the step they had initially warned about in October of last year by downgrading the servicing rating of Bank of America on its prime, subprime and second lien mortgage loans as well as for its special servicer rating.
 

The rating, referred to as SQ or Servicer Quality ratings, has a high score of SQ1 and a bottom of SQ5. BofA’s servicer rating had been at the high category of SQ1. The recent downgrade puts BofA at SQ2. Moody’s SQ review covers at least nine areas of servicing functions, including management, staff experience/training/compensation, loan administration, arrears management, loss mitigation, IT systems/reporting, general quality and guidelines and financial stability. The weighting of these factors depends on whether the rating is for the Servicer as primary, special or master servicer. In the case of BofA, it was as primary servicer.

 

And BofA is not out of the woods yet. Moody’s has stated that BofA remains under review for further downgrade due to their foreclosure process.  Given the complete disarray of the loss mitigation systems, as well as claims that the staff of the servicing shops are overwhelmed and inadequately trained, it is not surprising that BofA expected this downgrade.

                                               

However, as one of the largest servicing portfolios with 13.3 million loans under management (excluding REOs), this little speed bump will not slow down the massive servicing structure. With new management recently put into place, as well as compliance with the recent Consent Order signed by BofA with the OCC and the Federal Reserve, things may start looking up for the servicing group. Whether or not they can make money at this side of the business is another question.  The trick is cost containment while the portfolio continues to be stressed by delinquencies, short sales, foreclosures and  aggressive plaintiff litigants who want homes for free. Infrastructure building, with clear policies and procedures, training and auditing is the only way to clear this up.

               

Moody's Fires A Warning Shot at the Fed.

From the March 15, 2010 article in the New York Times by David Jolly[http://www.nytimes.com/2010/03/16/business/global/16rating.html?hp]  Moody's was reported as saying that "Major Western economies have moved “substantially” closer to losing their top-notch credit ratings, with the United States and Britain under the most pressure . . ." Even better is their comment that “their ‘distance-to-downgrade’ has in all cases substantially diminished.”

For those that can read between the lines, Moody's statement of “Preserving debt affordability (the ratio of interest payments to government revenue) at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion” looks like a veiled threat against Congress, given that the Obama administration is looking to increase federal debt to 64% of G.D.P. Looks to me that they are saying we are going to have a significant tax increase to cover federal debt service.

As reported, U.S. debt currently remains affordable, as the debt affordability ratio fell to 8.7 percent in the current year, after peaking at 10 percent two years ago. If that trend were to reverse, which it would based on the desire to increase federal debt, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”

And what exactly is the testing of "social cohesion." Is Moody's worried about the outbreak of anarchy if the U.S. Governmnet raises taxes and cuts more social services (the fiscal adjustments) to cover its debt service to avoid a downgrade? I think they are.

I guess if the government wants to keep their ratings up (and limit the cost of raising more capital in the world market) Congress should not investigate how Moody's (or S&P) concocted AAA ratings for sub-prime mortgage securitization structures where the loans underlying the securities were comprised of such strong products like 2/28 interest only teaser rates, negative amortization and "pick-a-payment" loans. Clearly, Moody's thought that those securities were well worth their AAA rating. I wonder about the debt affordability factor that Moody's used in their analysis of those structures.