Another $587 million in unrealized losses may still be lurking in RMBS portfolios serviced by Ocwen Loan Servicing, analysts at Bank of America Merrill Lynch said in a report on Friday.

Surprise losses can significantly alter the performance of bonds. Last month’s losses on 170 U.S. residential mortgage-backed securitizations acquired by Ocwen from Homeward Residential were pushed through in a single remittance period.

The delay in recognizing these losses allows mezzanine bonds to continue receiving interest payments and reduces the excess spread available to amortize more senior bonds, according to Moody’s Investors Service.  

Although 2009 HAMP guidelines require that servicers treat forborne principal on modified loans as realized losses on the mortgage pool; based on the surprise losses announced last month, investors could be buying mortgage bonds that have a significant amount of undisclosed losses that will become apparent at a later stage.

Analysts at BofAML said that option ARM and subprime loans have “substantially higher exposure” to potential unrealized losses compared to the prime and alt-A sectors.

“This is likely attributable to the fact that the sectors have had a higher level of modification activity, providing more opportunity for write-downs to go unrealized,” explained analysts in the BofAML report.   

The Residential Capital portfolio has the highest level of potential unrealized losses at $750 million, according to BofAML. Ocwen acquired the portfolio in February.

“It took roughly five months after closing its acquisition of the Homeward portfolio for Ocwen to realize losses on modifications where necessary,” said the BofAML analysts. “Since the ResCap acquisition closed in February, losses may start to come through in the next month or two if the loans are onboarded and evaluated at a similar pace.”

This month the servicer purchased the rights to service $78 billion in mortgages from OneWest Bank, the former IndyMac Bancorp.

BofAML said that the IndyMac portfolio has high potential losses in both the alt-A and payment option ARM sectors, totaling $358 million.  However it’s likely to take Ocwen several months to closely evaluate the portfolio before any action is taken.

Analysts at BofAML said that Ocwen’s Litton, Saxon and HomeEq, despite having been acquired in 2011 and 2010 respectively, still face up to $400 million in potential unrecognized losses that are mostly contained to the subprime sector.  

“Given the amount of time Ocwen has serviced these loans, it is unclear to us why there still seems to be such a high level of unrealized losses,” said analysts.

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