Fitch Ratings has been carefully tracking for the last several days last month’s interest shortfalls on certain subprime deals serviced by Ocwen Financial Corp.  

The rating agency has been involved in ongoing discussions with senior management for Ocwen and Wells Fargo’s trustee operations to determine the immediate cause and  the likelihood of the continuation of the factors that lead to the interest payment shortfalls.

In these deals, Ocwen reported interest payments to senior note holders that were in an amount less than would have been expected under the structure of the offerings.

‘In these discussions, it was determined that Ocwen had materially increased its modification program activity and many modifications involved principal reductions in addition to interest rate reduction and/or forgiveness of other payment and cost amounts,’  Managing Director Diane Pendley said in a release from Fitch.

The rating agency said that April was the first month where a sizable number of mods were reported through to the trustee for the May distribution. Ocwen indicated that it continued to report monthly activities on these transactions like in previous months.

In discussions Fitch had with Wells Fargo, the trustee indicated that as a result of the material increase in mods being performed throughout many RMBS deals, the firm had recently developed an enhanced reporting format. This enhanced version is based on the trustee’s participation on an industry task force on the issue.

The trustee further indicated that it had circulated this new form to the servicers and if the servicer properly used this format, Wells Fargo would have enough information to know the proper allocation of funds and/or losses.

It is believed that Ocwen will be reporting in the new format for the upcoming cycle, Fitch said in a release.

Unless otherwise specifically addressed in the controlling legal documents, the rating agency thinks that amounts considered to be principal forgiveness will be treated as a mortgage principal loss and allocated to bonds according to the terms of the documents.

In most cases, Fitch said that these losses are applied to the principal balance of the most junior bonds outstanding in the deal.

Most RMBS deals usually do not consider an interest shortfall as an event of default and a mechanism exists to have shortfalls potentially recovered from available funds over time, Fitch said. The rating agency explained that shortfalls could be temporary, perhaps driven by a non-recurring circumstance and recovered quickly in subsequent months from excess interest, or essentially unrecoverable, likely resulting from poor portfolio performance.

‘The likelihood and expected timing of recoveries will determine whether a bond’s current rating will be affected by the occurrence of an interest shortfall,’ said Fitch Managing Director Vincent Barberio.

The rating agency is still monitoring the situation and will offer added market commentary if there are further developments.

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