Moody's Investors Service late last Wednesday put on watch for downgrade a handful of subprime lenders' servicing operations, helping to roil the already volatile ABX.HE 06-2 index, which broke below 80 last week. The move prompted perhaps the biggest concern among home equity ABS investors already holding securities to the forefront - that the recent challenging atmosphere for subprime lenders could bleed through to loan servicing quality. In subprime lending, servicer quality is considered one of the most crucial aspects of loan performance, particularly as borrowers' monthly payments go up as a result of rate resets and other structural nuances.
Citing a challenging subprime lending atmosphere and limited liquidity, Moody's threatened to lower the servicer ratings of Accredited Home Lenders, Ameriquest Mortgage Co., New Century Financial Corp., Novastar Mortgage and Terwin - each by about one notch. Accredited's SQ2' servicer rating could be lowered to SQ2-'; Ameriquest's SQ2+' rating could be lowered to SQ2'; New Century's SQ3+' rating could be lowered to SQ3'; Novastar's SQ2' rating could be lowered to SQ2-'; and Terwin's Specialized Loan Servicing shop could be lowered from SQ3' to SQ3-'. Moody's servicer ratings range from SQ1,' indicating a strong ability to mitigate or prevent pool losses, to SQ5.'