Amherst: Foreclosure problems mean RMBS investors may wait to get paid
Recent foreclosure problems at mortgage servicing companies will increase an already extended liquidation timeline and will lower advances paid to securitization trusts, according to research from Amherst Securities. Major servicers Bank of America (BAC), JPMorgan Chase (JPM) and Ally Financial's (GJM) GMAC Mortgage suspended foreclosures to refile certain signed foreclosure affidavits. Others such as Wells Fargo (WFC) refilled without a moratorium. Servicers are often required to advance principal and interest on nonperforming loans to securitization trusts and the investor if the loan is deemed "recoverable" or "reasonably recoverable," according to language in most primary servicer agreements on mortgage pools. While these terms are rarely defined, most servicers will make the advance as long as the liquidation severity is calculated to be less than what's owed on the loan. As soon as the severity appears to go over that, the servicer usually cuts off advances. With some subprime pools experiencing around 60% delinquency rates, servicers are often required to finance the advances they make. With the extended timelines on moving these loans to liquidation, Fitch Ratings downgraded the entire residential mortgage-backed securities servicer sector. According to Amherst, "foreclosure-gate" will force services to review their advances and will mostly likely cut those payments. "A slowdown of current liquidations and the lack of servicing advances (causing excess spread to fall) will cut off the two major sources of cash flow for short tranches in subprime deals," according to Amherst. Write to Jon Prior.