Investors and analysts have howled over specific mortgage servicers' handling of delinquent loans for years. The ratings industry generally has not.
Despite widespread allegations of botched loan administration and conflicts of interest, a review of the three main ratings agencies' quality evaluations of servicers (including banks) show that virtually every servicer with a published rating is ranked as "proficient," "average" or better.
Fitch, which rates servicers on a scale of 1-5, has no servicers rated below a 3—a level it designates "proficient."
Standard & Poor's rates servicers according to how they stack up against "average" performance. Out of the more than 30 servicers on which it offers a public rating, all are average or better. Subpar scores exist under S&P's system, a spokesman said, but are usually kept confidential by the servicer client paying for them until they can improve their performance.
Moody's also rates servicer performance relative to "average," with 1 being "strong" and 5 being "weak." Out of the 25 companies it publicly evaluates, only the bankrupt Lehman Brothers' Aurora Loan Services ranks as a 4, or "below average."
Larry White, a professor at New York University's Stern School of Business, called this distribution of servicer ratings problematic. A ratings system in which just about every servicer scores average or better is inconsistent with basic math, he said, and with the last three years of the servicing industry's performance.
"The cynical part of me says I'm not surprised," said White, who has been critical of ratings agencies. "The non-cynical part says that it is depressing that the rating process still isn't identifying the guys who clearly are not behaving."
Moody's vice president Bill Fricke said the generally average or better ratings of its clients reflect that only larger and more established servicers tend to commission ratings.
Clear and unbiased guidance from ratings agencies or another source on servicing quality and data reporting could potentially be extremely valuable, investors and observers said. The quality and thoroughness of data in trustee reports is so poor that key statistics must be deduced—and the results do not always align with loan level data reported by CoreLogic and other providers. Modifications aren't always reported as such, the existence of balloon payments is sometimes ignored and other key pieces of information are omitted from trustee loan data.
This problem vastly complicates investor attempts to detect unusual activities. "The remits are just freestyle. They tend not to be that good," said an investor who held senior positions in a variety of mortgage investments. "With the potential restarting of the securitization markets, it's a big issue."
