Servicing

Bank servicers’ subprime loans see higher losses than nonbank servicers

Gap is significant in key states

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In the top states for home foreclosures, loans serviced by banks experience higher losses than those serviced by nonbank entities, Moody’s Investors Service says in a new report.

Moody’s report compares loss severities on loans serviced by banks and those serviced by nonbanks in Florida, New York and New Jersey over the past 12 months.

These three states account for 42% of all subprime loans in foreclosure in private-label residential mortgage-backed securities and in all three loss severities on bank-serviced loans were found to be more than 10% higher than they were on loans serviced by nonbanks.

“One of the main reasons bank-serviced loans see higher losses than nonbank-serviced loans is that the former usually have longer foreclosure timelines due to regulatory settlements,” says Vice President and Senior Credit Officer William Fricke. “The additional time needed to process foreclosures led banks’ foreclosure inventories to grow, while nonbank servicers did not initially face the same scrutiny, keeping their inventories smaller and their foreclosure timelines shorter.“

Bank-serviced loans saw higher losses because longer timelines increase expenses to the RMBS trusts that hold the loans, Fricke says in a special section of Moody’s second-quarter Servicer Dashboard titled “Loss Severities Are Higher for Bank-Serviced Loans than Nonbank-Serviced Loans.” Such expenses include principal and interest advances on delinquent loans, tax and insurance payments, attorney fees and property maintenance costs.

Nonbank servicers’ foreclosure timelines did eventually lengthen with the establishment of the Consumer Financial Protection Bureau and the adoption of the National Mortgage Servicing Standards, both of which affected the entire mortgage-servicing industry, Moody’s says. But because they still have a large pipeline of loans in foreclosure, bank servicers’ losses will remain higher than nonbank servicers’ through 2017 as both bank-serviced and nonbank-serviced loans move slowly through the liquidation process.

The national foreclosure inventory declined by 25.2% and completed foreclosures declined by 20.1% compared with August 2014, according to the latest report from CoreLogic.

The number of foreclosures nationwide decreased year over year from 46,000 in August 2014 to 36,000 in August 2015, representing a decrease of 68.9% from the peak of 117,357 completed foreclosures in September 2010.

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