Moody’s Investors Service and Standard & Poor’s downgraded Ocwen’s servicer quality rating last week  following “backdating” allegations made by the New York Department of Financial Services.

The downgrade could put some RMBS at risk of a "servicer event of default", according to Barclays.  

On Oct. 21, New York's top banking regulator stated in a letter to Ocwen that the mortgage servicer sent more than 6,100 borrowers notices of possible foreclosure only after their payment deadlines had passed.

The allegations point to what Moody’s called “serious issues with the company’s servicing systems and processes and raise the risk of “actions that will restrict Ocwen’s activities, monetary fines or additional actions that will negatively affect its credit strength”. As a result the ratings agency downgraded Ocwen’s servicer quality rating to 'SQ3' from 'SQ3+'.

Moody’s also took related rating actions on Altisource Solutions and Home Loan Servicing Solutions, (both companies were spun off of Ocwen) because their ratings depend in large part on their reliance on Ocwen. Altisource’s corporate rating was cut to ‘B2’ from ‘B1’ and its senior secured bank credit facility to ‘B2’ from ‘B1’. Home Loan Servicing Solutions’ corporate rating was  downgraded to 'B2' from 'Ba3' and its senior secured bank credit facility to 'B2' from 'Ba3'

Similarly, S&P downgraded the servicer’s long-term issuer credit rating to 'B' from 'B+.' All three major agencies, including Fitch Ratings, continue to hold Ocwen on negative watch/outlook.

Further downgrades in Ocwen’s servicer ratings cannot be ruled out. S&P already stated in its report last week that it could take further action if, for example, the regulatory probes into Ocwen lead earnings and cash flow to fall.

Barclays analysts stated in a report last week that in some RMBS a servicer event of default is triggered once the servicer ratings fall below a certain levelt, although the triggers vary widely from deal to deal. "Some require the servicer rating by any agency to drop below a threshold, some rely on just S&P ratings, some also require an RMBS note to be downgraded as a result of a servicer rating downgrade and some have no such clause at all,” stated the report.

A two-notch downgrade by any of the top three agencies could also put Ocwen in breach of its GSE servicing requirements.  

Still, an event of default triggered by a servicer downgrade doesn't necessarily mean investors will take action. Barclays stated in the report that "unless there are questions on its ability to service loans, there may be instances in which the investors/trustee decide to continue with Ocwen". 

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