Though Standard & Poor’s and Fitch Ratings announced negative actions on Fairbanks Capital Corp.’s servicer ratings, the outstanding transactions serviced by the company have not been impacted, said Credit Suisse First Boston.
Last week, S&P lowered Fairbanks servicer rating from Strong to Below Average. This move disqualifies Fairbanks from being primary servicer on any deals rated by S&P going forward. Fitch, meanwhile, has placed Fairbanks' servicer rating on ratings watch negative pending a review that will take place over the next 30 days.
CSFB also noted that before these rating actions, Fairbanks was the target of several lawsuits as well as reviews by the HUD, the Federal Trade Commission and several states. Legal action against Fairbanks can be classified in three ways: private action (e.g., consumers in California), state action (e.g., W. Virginia and Maryland) and federal action (HUD and the FTC), analysts wrote. At this point, CSFB stated that it does not have a real good feel how this will play out, but believes that none of the private lawsuits have been certified as class action.
Potential risks for buysiders include litigation-related risk. For instance, legal action has caused the temporary freezing of foreclosure in W. VA. This could slightly increase the loss severity. Headline risk is also a factor —Fairbanks-serviced paper may trade with a liquidity premium. Servicing transfer risk might also be an issue. “There are many moving pieces to this story, but at this point the most significant event is S&P’s rating action,” wrote analysts from CSFB. “Clearly Fairbanks is suffering from severe growing pains, and this rating action largely is a statement of concern over the management of that growth."
There hasn’t been any material impact of this rating action on outstanding deals serviced by Fairbanks, said analysts, adding that investor participation on deals in the process of being closed with Fairbanks as the servicer has been exceptionally strong. The spreads on deals with Fairbanks serviced mortgages have also remained materially unchanged.