The more than $1 billion of losses retroactively recognized last week, as a result of mortgage modifications on 170 US residential mortgage-backed securitizations, are credit negative for these transactions, according to a Moody’s Investors Service report.

Wells Fargo Bank, N.A., the trustee and securities administrator on the deals reported that loans that had been previously modified as forbearances were reclassified and reported as realized losses in May.

According to Ocwen Loan Servicing, which began servicing the transactions in December 2012, the transactions incurred the losses because of principal forbearance modifications the previous servicer, Homeward Residential Inc., undertook before July 2012. The losses all relate to previously unrecognized forborne principal prior to July 2012.

Homeward Residential, formerly known as American Home4servicing was sold to Ocwen last year.

“The 2009 HAMP guidelines require that servicers treat forborne principal on modified loans as realized losses on the mortgage pool, but on these transactions recognition of the forborne principal prior to July 2012 did not occur until last month,” said Moody’s analysts.

In 50 transactions, the losses exceeded $10 million each; in 13 of the 50, those losses exceeded $30 million each. In another 57, losses were $1-$10 million apiece. Subprime mortgage loans back the majority of the affected transactions. A JP Morgan securitization report published today said that on average these loans experienced $118 million in losses over the past three months.

“The delay in recognizing losses allowed mezzanine bonds to continue receiving interest payments, thereby reducing excess spread available to amortize more senior bonds,” explained Moody’s analysts in a report today.

Moody’s said that the surprise write-down also exposes some senior bonds whose payment priorities are now more likely to change earlier than previously expected.

Ocwen, said Moody’s, believes the situation is a onetime occurrence and does not expect additional losses in these transactions resulting from old forbearance modifications.

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