Servicing Fees Eat Up What's Left After Foreclosure: Moody's
An increasing number of severely delinquent mortgages that were securitized during the boom years are sustaining losses that are greater than the loan's original principal balance.
In some cases, on loans that have been in foreclosure for three years or longer, losses are wiping out the cash flow that normally would get paid to investors in private-label residential mortgage-backed securities, according to a report from Moody's Investors Service.
While a property is almost never worth nothing, servicing fees and advances of principal, interest, taxes and insurance payments by servicers to investors are increasingly exceeding the mortgage's outstanding balance, Moody's analysts have found.
Such loss severities of 100% or greater will continue to occur, Moody's says, because of the lengthy timelines in judicial states where foreclosures are processed through the courts. Liquidations in which losses exceed 100% have been rising since mid-2012.
"When you have a loan liquidated with high severity it represents costs the servicers have put out in the form of advances and they have the right to recoup those extra expenses off the top," says Peter McNally, a vice president and senior analyst at Moody's.
In April, roughly 36% of subprime loans that were liquidated in private-label mortgage-backed securities resulted in losses higher than 100%, Moody's found. Roughly 20% of alternative-A loans, 12% of option adjustable-rate mortgages and 5% of prime jumbo loans had losses that exceeded 100% in April. Most of the loans were delinquent for 30 months, or longer.
Though there has been a drop in the number of loans going delinquent, the proportion of liquidations with losses greater than 100% "should continue to rise," simply because so many loans "have been delinquent for a very long time," says Jayesh Joseph, a Moody's analyst.
"The servicers are able to liquidate the low-hanging fruit more easily than the ones that are in judicial states," he said.