Principal writedowns typically have a negative impact on the performance of residential mortgage-backed securities by interrupting cash flows to bond holders, but the terms of the settlement are largely consistent with Ocwen’s existing programs. This means Ocwen will continue to write down principal as before the settlement rather than doing so more aggressively, according to a recent Fitch report.
“Fitch believes that this agreement provides improved clarity and formalization of Ocwen's existing processes,” the ratings agency stated in a press release this week.
Ocwen has a reputation for writing down principal of nonperforming mortgages faster than many bank servicers or its nonbank servicing peers, which can result in selling of RMBS when Ocwen takes over the servicing of the underlying loans from another servicer.
However, this practice lies outside the consent agreement reached with the Consumer Finance Protection Bureau and all state attorneys general except Oklahoma. Rather, the authorities allege that Ocwen provided false and misleading information to borrowers about their accounts, denied loan modifications to eligible borrowers, robo-signed court documents through the foreclosure process, and miscalculated interest rates and other fees.
Ocwen will be expected to perform principal reduction modifications totaling $2 billion to under the settlement to account for the alleged faulty servicing practices of Ocwen and other entities from which Ocwen acquired servicing responsibilities. In addition, Ocwen is to pay their portion of $67 million into a $127 million fund. The fund aims to provide cash payments to borrowers with foreclosed homes sold between Jan. 1, 2009, and Dec. 31, 2012. Ocwen will be paying into this fund from its existing reserve account.
Ocwen has agreed to reach the target level within a three-year time period. The modifications would reduce the principal balance of each loan to a level that brings the borrower's loan-to-value ratio to 95% or lower over a three-year period. This is contingent on borrowers remaining current with their mortgage payments.
The ratings agency believes that the settlement guidelines are largely consistent with Ocwen's existing programs and process, including the Shared Appreciation Modification program, in place for the past several years. It bases this belief on its review of Ocwen's historical modification activity, including those involving principal reductions. Ocwen’s program has allowed for principal reductions to 95% LTV.