Due to growing concerns raised by the GMAC foreclosure scandal, Fitch Ratings believes loss severities on residential MBS could worsen, and is warning servicers to double-check how they foreclose on troubled loans.
In a new notice to servicers, Fitch said that if it determines a firm's "processes are not adequate and remedial actions are not sufficiently robust," it will take rating actions against companies.
GMAC/Residential Capital Corp., the mortgage arm of Ally Financial, is under investigation by a handful of states for shortcomings in its foreclosure practices. Ally has temporarily suspended certain foreclosures in 23 states.
Fitch said that "depending on the required actions to remedy" foreclosure problems "materially lengthened liquidation timelines and increased legal costs may lead to higher loss severities for affected RMBS transactions."
It added that high loss severities already projected on defaulted loans in these states will limit the initial magnitude of any negative rating actions. But Fitch warns that state probes "may highlight weaknesses in the processes, controls, and procedures of certain RMBS servicers and may lead to servicer rating downgrades."
The rating agency said while most of the media coverage has centered on Ally/GMAC, "Any servicer with a significant portion of their portfolio in judicial foreclosure states will be either directly or indirectly impacted by the attention focused on this problem."
