A lawsuit filed yesterday against Nationstar Mortgage LLC aims to stop the servicer from future auctions of mortgage notes of delinquent loans backing residential mortgage securities via the website www.auction.com.

The lawsuit filed by mortgage-bond investor KIRP LLC in the New York State Supreme Court in Manhattan, alleges that a note sale is not an option available to the servicer, and second, that the sale is harmful to the interests of the investors in the RMBS trust relative to other alternatives, according to a Barclays report published today.

In U.S. RMBS transactions, it’s the mortgage servicers’ responsibility to cover certain payments, known as “advances”, for the benefit of RMBS security holders; when borrowers fail to make loan and other payments. 

Investors allege that that two-day auction held on February 19, 2013 and March 4, 2013 and a third auction scheduled for March 11, 2013; have resulted in “avoidable” losses to the trust. In some instance Nationstar is alleged to have sold off the mortgage notes at 32-65% of broker-determined value of the underlying properties. Investors said that the auction allowed Nationstar to more quickly recoup prior servicing advances . Full reimbursement of advances can take months or, in some cases, years.

Barclays said in the report that in most cases, as alleged in the lawsuit, the servicing agreement does enumerate the possible alternatives to a foreclosure, including modifications/deferrals, short sales, and short refi; but does not list the a note sale as an option.

“For investors, the real issue is not if the servicer benefits but whether note sales are a better Net Present Value option for the deal than other alternatives, including foreclosure sales,” said analysts at Barclays. “On the one hand, a significant amount of money chasing NPL assets might result in decent recoveries on these loans and shorten timelines, and would therefore be a positive.”

However, if the loans were adversely selected where, in extreme instances, the servicer was unable to take the borrower to foreclosure, it would be problematic “as inability to foreclose might be grounds for potential rep and warranty recoveries that investors may end up foregoing after a note sale,” the analysts explained.



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