B&C Bankruptcies Could Affect Servicing Fees

Rating agency DBRS is warning that the bankruptcy of prominent subprime mortgage lenders could lead to a change in the servicing fee on loans serviced by those companies.DBRS senior vice president Kathleen Tillwitz, who authored a new report on subprime lending, noted that there is historical precedent for bankruptcy courts to impose a mandatory increase in the servicing fee, citing a case involving bankrupt manufactured housing lender Conseco several years ago. In that case, a bankruptcy court increased the servicing fee from 50 basis points to 125 bps to facilitate the sale and transfer of the servicing asset. While the increased fee is designed to entice servicers to take over a portfolio when there are "few interested parties or a large number of delinquent loans" in a portfolio, it has the effect of leaving less money for the investors who own bonds securitized by the loans.