The foreclosure process implemented by U.S. mortgage servicers might stall foreclosures in some states and lead to increased RMBS loss severities, according to Fitch Ratings.
High loss severities already projected on defaulted loans in these states will limit the initial magnitude of any negative rating actions for outstanding Fitch-rated RMBS with heavy exposure to affected states.
However, Fitch said that weaknesses in the foreclosure processes, controls and procedures of certain RMBS servicers could lead to servicer rating downgrades by the rating agency.
Key risks identified has been concerns over foreclosure affidavit data accuracy resulting from improper controls maintained by servicers in verifying the information in the affidavit.
While servicers have historically maintained quality control processes to ensure that affidavit data presented is cross-checked and accurate, these processes have proven to be deficient in some cases.
This is either because of operational constraints caused by the heavy foreclosure volume that is being processed, oversight or training limitations, or other factors.
"Any servicer with a significant portion of their portfolio in judicial foreclosure states will be either directly or indirectly impacted by the attention focused on this problem,’ said Diane Pendley, managing director and head of U.S. RMBS operational risk for Fitch.
Fitch is currently contacting its rated servicers regarding their specific internal processes used to review and execute foreclosure affidavits to find out if any newly implemented or planned changes are underway caused by these recently disclosed concerns.
Servicers that determine they have filed deficient foreclosure affidavits would be expected to file amended affidavits with the various courts involved, or take other actions as their legal staff finds appropriate, in the most expeditious manner possible, according to the rating agency.
This process, Fitch said, could be a simple substitution of affidavits for active foreclosures. But for completed foreclosure actions within the judicial states — even with no inaccuracies in the affidavit — the level of required action will materially depend on the opinion of the courts. Therefore, it remains to be seen if any completed foreclosures could actually be overturned.
"Depending on the required actions to remedy deficiencies, materially lengthened liquidation timelines and increased legal costs may lead to higher loss severities for affected RMBS transactions" said Rui Pereira, managing director and head of U.S. RMBS for Fitch.