B&C Accounts for 40% of Defaults
Of the more than 2.6 million home loans that are currently overdue or in foreclosure, approximately 40% were made to subprime credit quality borrowers, according to DBRS and published reports.
"I think 40% was kind of eye opening for all in the industry," said Kathleen Tillwitz, a senior vice president at the rating agency who authored a recent report on the state of the subprime mortgage market. While 2.6 million home loans being overdue or in foreclosure "is a huge number," Ms. Tillwitz says the industry is taking steps to get the problem under control.
"I think in light of the subprime guidance and in light of the statement regarding prudent workout practices, we are going to see fewer loans going into foreclosure. Nobody wants to be the next Fairbanks, Household or Associates and get hit with a huge fine for not originating or servicing loans appropriately," Ms. Tillwitz told MSN.
Instead of focusing on timelines, servicers are now in a state of mind to avoid foreclosure wherever possible by keeping troubled borrowers in their homes, she said.
Servicers are limited by pooling and servicing agreements on the type and amount of modifications they can do on loans that have been securitized, but PSAs generally do allow for modifications. Historically, however, interpretations of what modifications can be done varied greatly from one servicer to another because of differing interpretations of what was allowed. Generally, most companies limited modifications to no more than 5% of a security in order to avoid violating the REMIC tax code.
The American Securitization Forum has circulated a proposal to clarify the definitions and interpretations so that everyone will be working on the same page when it comes to modifications and REMIC compliance.
Another concern in today's mortgage industry is the impact that the failure, sale and bankruptcy of many subprime lenders will have on servicing. Delinquency rates often temporarily spike after a servicing transfer, due to confusion about where payments should be sent.
Ms. Tillwitz said that to date, the increase in B&C loan servicing transfers has not had a material impact on delinquencies or defaults, but she noted many proposed sales or transfers that have been announced have yet to occur. She said that subprime borrowers typically need a lot of contact from their loan servicing in order to stay current on payments, and lenders need to ensure that communication is not disrupted by a transfer or sale of servicing.
"In light of the number of firms going out of business, declaring bankruptcy or being acquired, it is something we have to watch very carefully," she said.
Another concern for bondholders in cases of a subprime bankruptcy is the possibility that bankruptcy courts might increase the servicing fee, essentially stripping cash flow away from the bondholders, she noted.
In one manufactured housing case involving the bankruptcy of Conseco, a bankruptcy court raised the loan servicing fee from 50 basis points to 125 basis points in order to facilitate the transfer of servicing to a new company.
DBRS, formerly known as Dominion Bond Rating Service, is headquartered in Toronto. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com