Moody's cuts BofA mortgage servicing ratings

By Joe Rauch

CHARLOTTE, North Carolina (Reuters) - Bank of America Corp's <BAC.N> mortgage servicer quality ratings were downgraded by Moody's <MCO.N> on Tuesday, because of a deterioration in the company's collections and loss mitigation on home loans.

The credit rating agency said it downgraded both BAC Home Loans Servicing LP and Bank of America, N.A. to SQ2 from SQ1 as a primary and special servicer for both first and second lien mortgages.

Moody's action moves BofA down one notch from the highest rating on a five-step scale used by the ratings agency for mortgage servicing. Moody's also said it would maintain a review for possible future ratings cuts, except as a primary servicer of second lien mortgages.

A BofA spokesman Dan Frahm said the downgrade was not a surprise, and the cuts reflected a recent settlement with bank regulators over problems with the industry's foreclosure practices.

Frahm said the bank expected the rating to rise again after the bank complies with the settlement with bank regulators and finishes the overhaul of its foreclosure practices.

Charlotte, North Carolina-based Bank of America is the largest servicer of U.S. home loans and its mortgage operations have been buffeted by controversy in recent months.

Last Fall, the bank temporarily suspended foreclosures after critics argued the industry cut corners with shoddy court documents that were used to repossess homes.

On October 4, 2010, Moody's placed BofA's servicer ratings under review for a possible downgrade, as irregularities in the industry's foreclosure processes came to light.

Investors also fear the bank could be on the hook to repurchase billions of dollars of toxic mortgages held by outside investors through mortgage-backed securities.

(Reporting by Joe Rauch; Editing by Tim Dobbyn)