Ocwen Financial's agreement to write down $2 billion in principal of the mortgage it services should not impact Fitch Ratings’ assessment of any of the bonds backed by these mortgages.

Principal write downs typically have a negative impact on the performance of residential mortgage backed securities (RMBS) by interrupting cash flows to bond holders. But in a report released today, Fitch said that the terms of the settlement are largely consistent with Ocwen’s existing programs and will not result in the servicer writing down principal any more aggressively than it currently does.

“Fitch believes that this agreement provides improved clarity and formalization of Ocwen's existing processes,” the ratings agency stated in a press release.

Ocwen has a reputation for writing down principal of nonperforming mortgages faster than many bank servicers or its non-bank servicing peers, which can result in selling of RMBS when servicing of the underlying loans is transferred to Ocwen.

However, these practices were not the subject of the consent agreement reached with the Consumer Finance Protection Bureau and all state attorneys general except Oklahoma. Rather, the authorities allege that Ocwen provided false and misleading information to borrowers about their accounts, denied loan modifications to eligible borrowers, robo-signed court documents through the foreclosure process, and miscalculated interest rates and other fees.

Under the settlement, Ocwen will be expected to perform principal reduction modifications totaling $2 billion to account for the alleged faulty servicing practices of Ocwen and other entities from which Ocwen acquired servicing responsibilities. In addition, Ocwen is to pay their portion of $67 million into a $127 million fund. The fund was designed to provide cash payments to borrowers whose homes were sold in a foreclosure sale between Jan. 1, 2009, and Dec. 31, 2012. Ocwen will be paying into this fund from its existing reserve account.

Ocwen has agreed to reach the target level within a three-year time period. The modifications would reduce the principal balance of each loan to a level that brings the borrower's loan-to-value ratio to 95% or lower over a three-year period. This is provided the borrower remains current with their mortgage payments.

Based on its Fitch’s review of Ocwen's historical modification activity, including those involving principal reductions, the ratings agency believes that the settlement guidelines are largely consistent with Ocwen's existing programs and process, including the Shared Appreciation Modification (SAM) program, in place for the past several years. This program has allowed for principal reductions to 95% LTV. Also, the historical level of principal reductions provided under SAM suggest that the $2 billion target level for modifications may be achievable without a need for a significantly more aggressive effort by Ocwen.

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