Rating Agencies Gear Up for More Scrutiny.(Moody's Investors Service)(Brief Article)

In subtle ways, all three of the major rating agencies have made changes that suggest investor scrutiny of loan servicing on mortgage-backed securities has increased.

Moody's Investors Service earlier this year started issuing formal servicer ratings, joining Fitch and Standard & Poor's in that business.

S&P recently added a "select servicer seal" to allow servicers on its lists to further differentiate themselves. And Fitch recently added plus and minus signs to its servicer ratings to further differentiate between servicers that receive the same numerical grade.

Officials at all three rating companies say that with the economy slowing down and delinquency rates edging up, investors are paying more attention to servicers that manage mortgage-backed securities transactions.

Mary Kelsch, a director at Fitch, said the growth of subprime lending has also contributed to demand for servicer ratings.

Also, mergers and servicing transfers, particularly within the subprime world, have led to more scrutiny of the quality of loan administration, collections and loss mitigation work. She notes that some once-major players in the subprime world, such as CityScape, ContiFinancial and United Companies, have gone out of business. That left investors feeling skittish about the servicers managing their loans. And data showing evidence of an economic slowdown only increases the concern about how well servicers are prepared to manage an increase in default management work.

"Are they staffed for that? And can they handle it?" Ms. Kelsch said. "Everyone is going to have higher defaults in that kind of environment. Can you manage them and mitigate losses?"