In the latest sign of trouble at Accredited Home Lenders, Fitch Ratings said yesterday that it has downgraded the company’s residential primary servicer rating for subprime product to ‘RPS3-‘ from ‘RPS3+’. Fitch said its rating action reflected the challenging operating environment in the subprime mortgage market and uncertainties over Accredited’s ability to maintain adequate funding and remain viable over the intermediate term. Servicer ratings downgrades can be a significant problem for mortgage lenders like Accredited, as a ratings drop may lead to a violation of servicing covenants in place with the company’s creditors. New Century recently disclosed that ratings downgrades by Moody’s at Fitch caused numerous creditors to pull servicing rights from the troubled Irvine, Calif.-based subprime lender. Lower servicer ratings also increase the cost to the issuer in the securitization process, meaning that Accredited is likely to make less money on securitizing its originations than a higher-rated competitor. “Accredited’s cost of funds just went up,” said one source, on the condition of anonymity. “And I have to think this is a time when they need all the liquidity they can buy.” On March 16, 2007, Accredited announced that in order to alleviate pressure from margin calls, it had reached an agreement to sell, at a discount, $2.7 billion of loans held for sale. Housing Wire reported on March 18 that the sale likely involved Nationstar Mortgage through a Fortress-affiliated REIT, although Accredited representatives have never officially confirmed that this is the case. Further, on March 20, Accredited announced that it has received a commitment for a $200 million term loan from one or more entities managed by Farallon Capital Management, LLC. Accredited has not yet filed its annual 10-K as it continues to evaluate impairment of the goodwill related to its acquisition of Aames Investment Corp. Prior to these recent developments, Fitch said it completed its on-site operational review in February 2007, which confirmed that Accredited’s servicing operations continue to perform at a level consistent with the prior year. Though Accredited’s recent loan sale and term loan relieved the company’s short-term liquidity pressures and afforded additional time to seek strategic alternatives, Fitch said its servicer rating action reflectsed challenges that still face the company in funding its ongoing servicing operation and maintaining its servicing quality in an increasingly challenging subprime mortgage market. Accredited has been servicing residential mortgage backed securities (RMBS) for seven years with servicing offices located in San Diego, CA, and Orlando, FL. As of January 31, the company’s U.S. serviced portfolio consisted of 58,748 loans with an unpaid principal balance of more than $9.6 billion. Since the prior year’s review, Fitch noted that Accredited had made several processing changes, technology enhancements, and upgrades to improve operations and increase productivity. These changes included enhancing its call center technology and proactively managing its early payment default and default management practices. In addition, the servicer has expanded its offshore outsourcing relationship to include early stage collections and inbound customer service calls. Although tools are in place to determine the best loss mitigation strategy, the servicer has not yet implemented automated loss mitigation technology, which management had indicated would be in place during the prior year’s review. For more information, visit http://www.fitchratings.com.

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