In what I believe is a first (or at least something that only occurs rarely), Fitch Ratings took the eyebrow-raising step of commenting in detail on a few of its recent rating actions today — its downgrade of ResCap and its move to place IndyMac on negative watch. While Fitch issued separate press statements, I’m going to combine the commentary into one post. (Just keep in mind that IndyMac hasn’t been downgraded — it’s only been put on notice for a potential downgrade.) Regarding ResCap, Fitch had this to say:
While Fitch’s actions mainly reflect the market disruption, Fitch has been concerned with the company’s weak operating performance, which has been noticeably worse than peer companies … Fitch believes that market illiquidity for non-conforming mortgages will cause ResCap to further alter its loan origination volumes and types toward lower-yielding conforming and less risky mortgages. While this reduces the company’s credit risk and funding needs, it will likely diminish the company’s already strained earnings potential going forward. Further, based on stressed industry conditions, Fitch believes ResCap is exposed to further writedowns of mortgage-related assets …
IMB has thus far weathered the storm, as short-term secured sources have dried up; the company has systematically reduced reliance on short-term, secured funding by growing deposits and utilizing Federal Home Loan Bank (FHLB) lines … While IMB has been able to sell roughly 70% of its production to the GSEs, this short-term solution is not consistent with the company’s strategy of seeking higher spreads from Alt-A products … Unlike some of its peers which are experiencing liquidity pressure, IMB does not rely heavily on capital markets for funding, and, as a result, was less affected by the recent liquidity squeeze … Nonetheless, Fitch believes that other challenges exist such as the ability to execute its strategy amid mortgage market turmoil, absorb higher than expected credit costs and withstand a further decline in California residential real estate prices … if the company’s seasoned management team and risk management capabilities endure profitability pressures and deteriorating asset quality, the Negative Rating Watch may be resolved without Fitch taking action.
