Fitch Ratings has today affirmed Scarborough Mortgage Services Limited's (SMS) UK Residential Mortgage Primary and Special Servicer Ratings at 'RPS2-(minus)(prime)UK', 'RPS2-(minus)(subprime)UK' and 'RSS3+UK', respectively.
The affirmation reflects the company's long tenure in third-party servicing, solid risk management techniques and continued investment in technology. SMS continues to receive both financial and strategic support from its parent, Scarborough Building Society (SBS), which has demonstrated its long-term commitment to the business. The ratings are further supported by an experienced senior management team, a sound internal control culture and good levels of training.
As at 30 September 2007, SMS had GBP3.4bn of residential mortgage loans under management, representing 25,770 loans, up from GBP1.68bn (14,650 loans) at end-July 2006. Approximately 73% of the portfolio is defined as subprime by value, while 25% is buy-to-let, 1% right-to-buy and 1% prime. This growth is attributable to several factors, notably the continued asset trading of North Yorkshire Mortgages, another wholly-owned subsidiary of SBS and the continued expansion of SMS's client base, as well as new originations volume from existing third-party lending clients.
However, continued growth may slow given current market conditions particularly affecting non-conforming lenders. SMS administers a wide variety of products, including variable, fixed, index-tracking and flexible loans. It does not currently administer any second-charge mortgages.
The company is also the named special servicer on assets totalling GBP1.96bn and is actively managing the workout process (loans over 60 days past due) for 253 loans totalling GBP37.6m. In common with other UK special servicers, SMS has relationships with several third parties involved in litigation, asset management and debt counselling.
In the year ahead, SMS is aiming to complete full automation of its loan risk-grading solution, which will provide fully automated collections strategies that will drive calling and letter campaigns for early stage arrears, as well as integrating with new dialler technology.
Fitch believes SMS would do well to build on its experience of special servicing including gaining familiarity with other workout strategies. It will also need to demonstrate the effectiveness of its collections strategies and loan risk grading in what is likely to be a challenging market environment.
Fitch rates residential mortgage loan primary and special servicers on a scale of 1 to 5, with 1 being the highest rating. For more information on the review and rating process for UK servicers, see Fitch's reports:"Rating Criteria for European Residential and Commercial Mortgage Loan Servicers" dated 20 August 2007, and "Rating European Mortgage Loan Servicers - UK Market Addendum", dated 25 May 2005. Both are available from the agency's website, www.fitchratings.com.
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