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Fitch cautions: Foreclosure gate is bad for RMBS servicing

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Fitch Ratings said the robo-signing scandal is negatively affecting servicing of residential mortgage-backed securities. The new warning comes as the mortgage industry has predicted that the fallout from the scandal would be limited. As of Thursday, Fitch holds a negative outlook for the RMBS servicer sector, which was previously stable. Total mortgage-backed securities issuance reached $1.78 trillion in 2009, according to statistics compiled by Inside Mortgage Finance. In short, the costs of dealing with the allegations are proving too heavy to maintain a sunny disposition on RMBS servicing. "Risks to servicers (now) include cost to research and remediate any errors, additional fees and resources, potential penalties and reputational risk," said Diane Pendley, head of U.S. RMBS Operational Risk for Fitch, in a statement. Furthermore, the negative attention from state and federal regulators, state attorneys general and even the government-sponsored entities is not helping, Fitch adds. "All servicers will be affected, even those fully in compliance with all foreclosure rules and regulations," the report concludes. "This is due to the increased amount of time and manpower it will take to properly address the much higher level of oversight and inquiries that are received, as well as the anticipated additional court delays." About one-third of RMBS servicers Fitch monitors report that they have completed internal reviews of their foreclosure process and found no need for corrective action. The other expect to be finished in the next few weeks. Nonetheless, the foreclosure crisis will continue to weigh on the market. "Final resolution of the foreclosure affidavit concerns and the multiple resulting investigations, along with assigned ownership rights prior to initiating foreclosure actions, may not occur until well into 2011 and possibly beyond," said Pendley. The worrisome knock-on effect to RMBS includes an increase in loss severities as these mortgages continue to nonperform. As a direct by-product of the recent foreclosure issues, Fitch currently expects any negative rating actions on RMBS tranches to be limited largely to noninvestment grade classes and tranches already with a negative outlook. Additionally, Fitch does not envision RMBS downgrades to exceed a single rating category in most cases. Write to Jacob Gaffney.

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