Fitch Downgrades IndyMac’s U.S. RMBS Servicer Ratings

Fitch Ratings has downgraded the U.S. residential servicer ratings for IndyMac Mortgage Services and placed its portfolio on Rating Watch Negative, citing “significant strategy change” is needed for its servicing operations.

The move follows an earlier announcement that Ocwen Loan Servicing intends to purchase the mortgage servicing rights to approximately $78 billion of IndyMac's portfolio of securitized agency and non-agency residential mortgage loans, as well as certain noncompliance issues.

As of June 30, IndyMac’s servicing portfolio consisted of 378,375 loans with an unpaid principal balance of approximately $88 billion, of which approximately 27% is Alt-A, 22% prime and 10% subprime product, up to 37% of the UPB is government sponsored enterprise products and 4% second lien product.

The ratings agency has downgraded the U.S. residential primary servicer rating for prime product from 'RPS3+' to 'RPS3'; from 'RPS3+'  to 'RPS3' for its Alt-A product; from 'RPS3+' to 'RPS3'  for the subprime product.

Fitch also downgraded the servicer’s special servicer rating from 'RSS3+’ to 'RSS3' and placed it under rating watch negative.

Among reasons to downgrade the division of OneWest Bank, analysts said, is due to the departure of IndyMac's head of servicing, with concerns over the fact that “servicing operations could deteriorate while the transfers are taking place.”

Loan transfers are projected to occur in multiple stages until completed by the end of the fourth quarter 2013, analysts note, plus “Ocwen is not expected to acquire any of IndyMac's servicing staff or operations in connection with the MSR purchase.”

The servicer ratings also reflect “instances of material noncompliance in the company's Reg AB report for the year ended Dec. 31, 2012,” and the financial condition of IndyMac and a Consent Order that IndyMac's parent, OneWest Bank entered into with the Office of the Comptroller of the Currency, (formerly the Office of Thrift Supervision) in April 2011.

IndyMac has addressed concerns raised in the Consent Order such as taking measures to enhance its foreclosure oversight, establishing a single point of contact for defaulted borrowers, and developing a comprehensive vendor management program.  Hence, Fitch said, on the up side, servicer ratings also incorporate these operational and process improvements.

Other macro-economic factors include overall concerns for the U.S. residential servicing industry and its ability to maintain high performance standards despite increasing compliance related servicing costs.