NEW YORK--(BUSINESS WIRE)--Link to Fitch Ratings' Report: U.S. RMBS Ocwen Forbearance Rating Actions for June 10, 2013
Fitch Ratings has reviewed 92 residential mortgage backed security (RMBS) transactions previously serviced by Homeward Residential Inc. (Homeward), and acquired by Ocwen Financial Corp. (Ocwen) in December 2012. A detailed list of rating actions and the performance analysts' contact information is available at 'www.fitchratings.com' by performing a title search for 'U.S. RMBS Ocwen Forbearance Rating Actions for June 10, 2013', or by using the link provided.
In May 2013, the trusts reported unusually large realized losses due to a revision in the reporting of principal forbearance modifications performed prior to July 2012. For Fitch-rated transactions, the realized loss was approximately $450 million, or roughly 3% of the affected trusts' outstanding pool balances.
Rating review summary:
--843 classes affirmed;
--20 classes downgraded;
--19 classes on Rating Watch Negative;
--1 class paid in full.
The classes placed on Watch Negative are in trusts where the realized loss reported in May does not appear to fully reflect the revised loss amount provided by Ocwen to Fitch. A portion of the revised losses may yet to be realized in all of the trusts.
All downgraded classes were rated 'CCsf' or 'Csf' prior to the review. All but one class placed on Rating Watch Negative is rated 'CCCsf' or 'CCsf'. The sole class on Watch rated above 'CCCsf' is currently rated 'Bsf'. 114 classes rated 'Bsf' or higher are affirmed, including 64 classes with investment-grade ratings.
The ratings of classes in the trusts most affected by the revisions had generally already experienced significant downgrade activity. Principal forbearance modification activity is generally highest among poor performing mortgage pools with large percentages of underwater borrowers.
Principal forbearance modifications reduce the principal balance of the loan amount for interest and monthly payment calculations. Forbearance differs from forgiveness by generally requiring that the borrower repay the full principal amount in the event of a property sale or loan refinance. If the loan is still outstanding at maturity, the forborne principal is generally required to be repaid as a balloon payment.
Historically, there has been inconsistency in the servicer reporting of forbearance amounts. Pooling and Servicing Agreements for transactions issued prior to 2010 generally do not explicitly address whether servicers are to report the forborne principal as a loss.
Additionally, the Home Affordable Mortgage Modification Program (HAMP) introduced in 2009 also did not initially provide guidance to servicers on how to report forbearance modifications. This was later clarified by the Treasury Department in June 2010 by directing servicers to report HAMP forbearance amounts as losses and trustees to allocate forborne principal as realized losses at the time of the modification. Any repaid forborne principal will be distributed to investors as a subsequent recovery.
Subsequent to the Treasury's guidance, servicers and trustees generally reported forborne principal as a loss for HAMP modifications, and typically for non-HAMP modifications as well. However, the treatment varied for forborne principal on previously completed modifications. Some servicers retroactively reported all previously modified amounts as losses while other servicers only revised the reporting on new modifications while leaving the reporting on prior modifications unchanged.
For Homeward-serviced transactions which Wells Fargo served as the Master Servicer or the Trustee, Homeward and Wells Fargo began reporting forborne principal for new modifications in a manner consistent with the Treasury's guidance in July 2012 but did not retroactively reclassify the reporting for modifications completed prior to that date. Upon recently completing the portfolio transfer to Ocwen as a subservicer for Homeward, Ocwen and Wells Fargo agreed upon a reclassification of prior forbearance modifications to maintain consistency with the reporting method used from July 2012 forward.
Based on feedback provided from servicers, Fitch believes it is not uncommon for a servicing portfolio to contain loans with forborne principal not reported as a loss. Servicing acquisitions could potentially lead to a reclassification of forborne principal as an immediate realized loss in some cases.
Fitch currently expects that any future reclassifications of forborne principal will primarily affect bonds with distressed ratings by accelerating losses which, in many cases, are likely to eventually occur. Of loans affected by the May reclassification, Fitch estimates the current weighted average loan-to-value to be approximately 140% (including the forborne principal). Despite more than 2/3 of the loans benefitting from more than one modification (including the forbearance modification), more than 30% of the loans are currently severely delinquent.
Fitch is currently conducting a survey among servicers on this issue. Fitch intends to provide further commentary as additional information is gathered.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. RMBS Surveillance Criteria' (Oct. 11, 2012);
--'Global Structured Finance Rating Criteria' (May 24, 2013);
--' U.S. RMBS Loan Loss Model Criteria' (Aug. 10, 2012);
--'U.S. RMBS Cash Flow Analysis Criteria' (April 19, 2012);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Jan. 25, 2013);
--'Criteria for Rating Caps in Global Structured Finance Transactions' (Aug. 2, 2012);
--'Counterparty Criteria for Structured Finance Transactions' (May 13, 2013);
--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 18, 2011).
Applicable Criteria and Related Research:
U.S. RMBS Surveillance Criteria
Global Structured Finance Rating Criteria
U.S. RMBS Loan Loss Model Criteria
U.S. RMBS Cash Flow Analysis Criteria
Criteria for Interest Rate Stresses in Structured Finance Transactions
Criteria for Rating Caps in Global Structured Finance Transactions
Counterparty Criteria for Structured Finance and Covered Bonds
Structured Finance Recovery Estimates for Distressed Securities