Moody's Growing Servicer Oversight

Moody's Investors Service may have been the last of the big three rating agencies to embrace servicer ratings, but the firm is rapidly expanding its servicer evaluation unit.

Warren Kornfeld, a senior vice president at Moody's, told Mortgage Servicing News that the group now employs seven people with an eighth ready to join the firm shortly. Over the last couple of months, the group has doubled in size.

Currently, Moody's provides servicer quality ratings on 32 lenders that manage MBS loans, more than double the number from a year earlier. And that figure is expected to grow to about 40 by the end of the year, Mr. Kornfeld said.

Moody's has expanded its review process to include more data drilling and more complex metrics, he added.

Mr. Kornfeld said investors are showing strong interest in servicer ratings, because rising interest rates and the emergence of new loan products suggest that delinquency and default rates could climb among the loans pooled into mortgage-backed securities.

Moody's embrace of servicer ratings is one example of how independent assessments of performance have gained acceptance in the market. While rating agencies failed to anticipate the customer service problems at some lenders, such as Fairbanks Capital, the regulatory scrutiny of nonprime mortgage servicers has added to demand for third-party oversight.

Mr. Kornfeld said that "much more so than in the past," MBS investors are concerned about the quality of loan administration and customer service.

"Investors more concerned about reputation and stability in the marketplace," he said.

He said Moody's has expanded its whole rating and review process to make it more robust while also decreasing turnaround time to get reports back to lenders and investors.

The rating is typically completed four weeks after a site visit and a draft report delivered to the company about four weeks after that, he said.

Mr. Kornfeld said Moody's tries to differentiate itself through its focus on loan performance measurements. Since servicers have many of the same processes to manage, they and investors are eager to see how their roll rates, timeline management and loss severity rates measure up against expectations.

Mr. Kornfeld said servicer ratings are now widely accepted on the mortgage side of the securities business. But rating servicers for other kinds of assets remains in development. Rating agencies are "still selling the idea" of servicer ratings to ABS investors and servicers, he said.

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