U.S. residential mortgage backed securities serviced by Nationstar will recognize about $1 billion of losses as the result of loan modifications, according to Fitch Ratings.

Fitch said today that Nationstar has informed the ratings agency that it intends to revise the way it reports principal forbearance on loans whose servicing rights it acquired from Aurora Bank in 2012. This will result in approximately $1 billion in losses for RMBS collateralized by these loans, with the revision likely to occur in the July distribution.

Fitch expects the impact to be concentrated in classes currently rated 'CC' or below and currently does not anticipate significant rating changes as a result of the revision.

Nationstar has indicated it currently does not anticipate future revisions on loans whose servicing rights it recently acquired from Bank of America, or on any other loans unrelated to the Aurora acquisition.

The announcement follows a similar revision in reporting by Ocwen Financial Corp. in May, which also resulted in approximately $1 billion in realized losses. Fitch reviewed 883 RMBS classes following Ocwen’s revised loss reporting and subsequently downgraded 20 classes, all rated 'CC' or below. It  expects to formally review the Nationstar transactions after the loss revisions are reported at the end of July.

Nationstar’s revised loss amount is roughly 1.5% of the total balance of the mortgage pools affected, Fitch said. The ratings of classes in the trusts most affected by the revisions have generally already experienced significant downgrade activity.

Principal forbearance modifications reduce the principal balance of the loan amount for interest and monthly payment calculations. Forbearance differs from forgiveness by generally requiring that the borrower repay the full principal amount in the event of a property sale or loan refinance. If the loan is still outstanding at maturity, the forborne principal is generally required to be repaid as a balloon payment.

Fitch said that, historically, there has been inconsistency in the way different servicers report forbearance amounts. “Pooling and servicing agreements for transactions issued prior to 2010 generally do not explicitly address whether servicers are to report the forborne principal as a loss,” it said.

Additionally, the Home Affordable Mortgage Modification Program (HAMP), introduced in 2009, did not initially provide guidance to servicers on how to report forbearance. This was later clarified in June 2010, when the Treasury Department directed servicers to report HAMP forbearance amounts as losses and trustees to allocate forborne principal as realized losses at the time of the modification.

Subsequently, servicers and trustees generally reported forborne principal as a loss for HAMP modifications, although Fitch has observed some reporting inconsistency across servicers, most notably in reporting of non-HAMP modifications HAMP modifications completed prior to the Treasury's guidance in 2010.

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