Mortgage modifications led to more than $1 billion of unexpected retroactive losses across 170 U.S. residential mortgage-backed securities, which are credit negative for these deals, according to Moody’s Investors Service.
Ocwen Loan Servicing began servicing the transactions in December 2012. However, the transactions incurred the losses because of
The losses all relate to previously unrecognized forborne principal prior to July 2012. The 2009 HAMP guidelines require that servicers treat forborne principal on modified loans as realized losses on the mortgage pool, but on these transactions recognition of the forborne principal prior to July 2012 did not occur until last month.
Moody's said that in 50 transactions, the losses exceeded $10 million each; in 13 of the 50, those losses exceeded $30 million each. In another 57, losses were $1 million to $10 million apiece. Subprime mortgage loans back the majority of the affected transactions.
Moody’s said that the surprise writedown exposes some senior bonds whose payment priorities are now more likely to change earlier than previously expected. “The delay in recognizing losses allowed mezzanine bonds to continue receiving interest payments, thereby reducing excess spread available to amortize more senior bonds,” explained Moody’s analysts in a report today.
Ocwen, said Moody’s, believes the situation is a one-off occurrence and does not expect additional losses in these transactions resulting from old forbearance modifications.
