|
Fitch: Servicers Face Trouble From Subprime Downturn
By James Comtois
Servicers of U.S. residential mortgage-backed securities products face numerous challenges, many of which have been highlighted by the rapid downturn within the subprime sector, according to a new report released by Fitch Ratings.
In its latest report, entitled "Changing Loss Mitigation Strategies for U.S. RMBS," Fitch focuses on conditions today in subprime, in which proactive, creative collection and loss mitigation strategies are needed. However, the report acknowledges that these conditions have the potential to affect servicing practices in other mortgage products as well.
According to Fitch, the volume of defaulted loans in subprime portfolios has exceeded the expected levels for this product and with the number of ARMs still moving into the reset phase, this number will increase unless an aggressive stance to work out these cases is adopted.
The report does not specifically delve into the reasons for these increased defaults, except as they affect the timing and opportunities available to the servicers to develop workable solutions.
Rapidly increasing volumes in default and foreclosure, as well as real estate-owned assets, present servicers with challenges that must be addressed on several fronts. These increases require servicers to quickly reassess their tools, staffing, training, timelines and vendor relationships.
As all participants simultaneously face this problem, the ability to hire experienced staff and add new or expand existing vendor relationships will be stressed by market competition for these individuals and services.
Additionally, the ratio of default to performing loans and the cost to provide multiple opportunities for borrowers and to obtain the information needed to make and document decisions will greatly affect the servicer's overall cost to service.
In the first quarter, Fitch conducted a survey of loss mitigation practices and the results or effectiveness of these practices and, where appropriate, has indicated the results of its survey.
In the current mortgage servicing environment, Fitch Ratings, as well as many other market participants and regulators, are focusing on a servicer's ability and willingness to work with borrowers to maintain homeownership. Many borrowers are in homes or have mortgages that severely stretch their budgets.
Declining home values and tightening credit standards on new originations have reduced refinancing opportunities for many borrowers. This results in more borrowers needing either alternate workout strategies or assistance in removing themselves from the situation.
RMBS loan modifications, which have been used infrequently in the past, are one possible solution and are discussed extensively in Fitch's report. Loss mitigation includes servicing practices that work with borrowers to keep their home or to assist them with the sale of the property.
Foreclosure liquidation is generally seen as the least beneficial option. However, as servicers are responsible to RMBS investors to minimize losses and therefore maximize returns, foreclosure may be the only recourse.
According to Fitch's report, both borrower and investor objectives can be addressed as long as loss mitigation strategies are aggressively pursued, decisions are made based on the best information possible and all parties are informed through proper reporting.
Click here for an archive of stories from the MSN newsletter.
| 
