Fitch: RMBS Servicing Shift May Uncover More Losses

Servicing of non-agency residental mortgage backed securities continues to shift from banks into the hands of non-banks, and this trend could drive more realized losses, according to Fitch Ratings.

Banks have been exiting the mortgage servicing business because new capital requirements make it less attractive to keep these rights on their books. Fitch expects this trend to continue as additional large mortgage servicing right (MSR) transfers are scheduled to be completed in the second half of 2013.

The agency cited as an example Ocwen Financial Corp., which has acquired portfolios from Homeward Residential and GMAC Mortgage and is in the process of acquiring MSRs from IndyMac Mortgage Services, a division of OneWest Bank, FSB, and from Greenpoint Mortgage Funding.

The transfers have uncovered some unrealized losses resulting from loan modifications that had not yet been reported by the previous servicers to the trusts. In May, Ocwen disclosed that RMBS it serviced would recognize $1 billion in losses as the result of a revision in the way it reports loan modifications. At end of the second quarter, Ocwen was servicing 47% of all non-agency RMBS subprime loans, according to Fitch.

Nationstar, another servicer to disclose that RMBS it services would recognize losses as the result of a reporting change, continues onboarding its sizeable MSR acquisition from Bank of America.

Fitch believes this reporting issue will continue to drive further loss adjustments in the third quarter. There continues to be a marked difference in the time to resolve delinquent loans between bank and non-bank servicers due to many factors, including regulations and staffing levels.