As if there were not enough considerations for investors sizing up the many distressed MBS still out there, it looks now like they should also take into account growing momentum in municipal efforts to get securities trusts and servicers to pay for distressed property upkeep or face fines.
Perhaps the only upside for investors related to this development is that it is somewhat quantifiable, although as Moody's Investors Service noted in a recent report it does also add to some unquantifiable costs such as possible lawsuits.
As noted on ASR sister publication National Mortgage News' Web site last week, servicers would pay a $100 vacant property registration fee in Springfield ($250 in Chicago) once it is determined that the property is uninhabited.
Both ordinances require servicers to post a $10,000 surety bond with the city to cover vacant property maintenance at a cost of generally $1,000-$1,500 per property, and then even if the city does not need to collect on the surety bond it returns only about half the bond amount.
Property maintenance costs would be sustained for around 10 months before the servicer takes title to the property on behalf of the securitization.
A Moody's spokesman said analysts have heard from servicers that momentum is building for municipalities to hold trustees responsible for the upkeep of distressed properties even prior to foreclosure.
There is a potential fine of $300 per day in Springfield, Mass., that can total up to $31,500 if the servicer does not enter required “mediation” sessions with borrowers within 45 days of a foreclosure notice.
The mediation, in turn, could result in a modification of the loan terms that could be less favorable to certain investors than liquidation, according to Moody's.
Moody's recent report also suggested that Springfield's ordinance could add to foreclosure delays because once the foreclosure notice is sent, the possibility of fines starts.
According to Moody's, such concerns could hurt the credit of both new and existing RMBS as more and more money is needed to modify loans and secure as well as maintain properties backing legacy deals and credit enhancement requirements for new deals could increase.
Potentially, municipalities with such ordinances could also mean loans in the affected jurisdictions would not be eligible to be included in pools. Ultimately the rating agency suggests this could hurt credit availability to already-struggling areas.
The concern appears to contribute to broader trends in the industry. As IndiSoft president and CEO Sanjeev Dahiwadkar noted in an interview last week, “The servicer is getting very cautious about the cost of servicing.” It also could be contributing to weakness in the housing market. As noted in an interview on this publication's website last week, Lenders One CEO Scott Stern believes continuing housing weakness has been one of the key things holding back originations that otherwise could be doing better due to what have been more favorable rates and a slight loosening in underwriting. Borrowers sometimes fail to see low housing prices as the bargain they are but rather as a risk, he said.