Moody's Investors Service will introduce formal servicer ratings, and expects to release its criteria within the next few weeks, the agency said.
While it will offer ratings similar to what Standards & Poor's Ratings Services and Fitch offer, Moody's is taking an approach more in line with Freddie Mac's approach, the agency said, which it views as a performance-based criteria.
The "results oriented" methodology will focus on the servicer's track record, and whether or not it has had a positive impact on portfolio performance.
"Some of the other [ratings] agencies have a little bit more of a checklist approach," said Diane Westerback, a vice president and senior analyst at Moody's. In essence, Moody's will put less weight on items like staff size or equipment and technology, but will focus on performance statistics, recovery approaches, and the management's ability to adapt to changing market conditions, Westerback said.
"We'll look at items like, Do they cure loans that are delinquent? [Do they do that] without going through the whole foreclosure process?'" she added.
Moody's will also consider factors like servicer reporting, ability to stay afloat, and strategic motivation (i.e. Does the servicer own equity in the deal? Do they charge incentive fees?).
"Servicing is being viewed as becoming increasingly important in its relationship to losses and recoveries," Westerback said. "There's an increased awareness that servicing does make a difference."
Roughly one-third of all servicing in the subprime home-equity market is in the hands of special servicers, Westerback said. She used ContiFinancial and UCFC as cases where servicing transfers/failures were crucial to the credit story.
Moody's will assign servicer quality (SQ) ratings from its highest SQ1, down to SQ5. A servicer with an SQ1 rating could change credit enhancement levels as much as 10%.
"It's important to note that that is the maximum amount it could change," Westerback said. "We would anticipate that the greatest change would be at the lowest level."
The SQ ratings will be applied to primary servicers and special servicers. The agency will also be using a pass/fail rating for master servicers.
"The general response has been very positive, as investors are always thirsty for more information, and also for truly comparable information," Westerback said. "Certainly most of the better servicers are interesting in getting the ratings. They want credit for it. The servicers want to know how they stack up."
However, she added that Moody's will not require servicers to obtain a rating in order for Moody's to rate a transaction. The rating is optional, though it can positively affect the credit enhancement levels for a deal.