Moody's Investors Service is ramping up its servicer ratings group with a significant increase in the number of companies it covers.

Moody's assigns ratings to about 45 servicers in RMBS and ABS, up from about 30 servicers a year ago, said Warren Kornfeld, managing director of the servicer ratings group.

That growth is expected to continue in the coming year, with more than 10 additional RMBS servicers to be rated.

"The pipeline is very strong," Kornfeld said.

The expanded activity has produced one new hire, which increased the size of the group to seven analysts. Aashish Marfatia came on board about two weeks ago as an associate analyst after four years with Capital One.

Rating ABS servicers is new for Moody's. It concentrated only on RMBS servicers before last year. The rating agency is making an extra push this year to expand into the ABS market, targeting servicers for credit cards, autos, equipment and student loans.

Moody's is also differentiating its servicer ratings from the competition with a robust performance review, Kornfeld said. As part of the performance review for mortgage servicers, Moody's reviews detailed information on individual loans and borrowers, including payment history.

"The amount of data we request has definitely increased for mortgage servicers," said Kornfeld, who added that Moody's reviews more than 75 pieces of data on each loan. "What we're really trying to do is gauge the impact of the servicer on performance."

In its servicer ratings outlook released last week, Moody's cited some challenges ahead, including a less favorable operating environment.

Moody's said servicers could experience rising delinquencies and losses following the historic lows of 2005.

Loss mitigation metrics could be impacted as the appreciation in home values level off. That will give fewer homeowners the option of refinancing to resolve outstanding delinquencies.

Moody's cautioned that loss mitigation methodologies will play an increasingly important role in reducing losses and in distinguishing servicers.

Additional challenges lingering from last year for mortgage servicers include: the impact from Hurricane Katrina; the need to provide adequate servicing for complex and increasingly popular affordability products such as option ARMs and interest-only loans; and uncertainty surrounding the requirements of Regulation AB.

Moody's said affordability products typically require an increase in staffing for loan boarding, customer service and collections.

Training of service associates is also critical, as borrowers may experience payment shock when their monthly payments increase due to an increase in the required principal payments or in the interest rate.

"Early intervention and assessment of the reason for default will be critical for affordability products, as payment shock may lead to a higher frequency of default," according to the servicer ratings outlook.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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