As loss mitigation has grown more complicated for servicers during the foreclosure crisis, reports sent to investors on the cash flows of these loans are growing less reliable, according to Barclays Capital
Servicers submit remittance reports to investors each month, recapping the payments and balances on the loans within those bonds. The report contains cash received from borrowers, payments to the servicer, recoveries from any loans that were liquidated through short sale or REO and the amount of principal and interest distributed to the bonds.
"Modifications result in significant alteration to the cash flow stream from a loan. Additionally, as they are typically combined with recoupment, the math gets fuzzy very quickly," BarCap said. "We have noticed a few common problems with the reporting in remit reports."
For modified loans, remittance reports are not specifying the exact amount of forgiveness, forbearance and the recapitalization of principal. But they are added to the cash flows, confusing investors who can only see a hole of information between the beginning and ending loan balance.
Also, what type of modification is used and some of the terms are never relayed to investors. And there are even reports of cash flows that are never explained in the reports. Such amounts are often called "other interest proceeds" and can represent a big portion of the payments to the bond, BarCap said.
Other problems have cropped up as well. Servicer advances are often reported as a total amount and rarely broken down by advances paid and recouped, and BarCap reported some servicers are advancing principal and interest off schedule.
For those loans that are liquidated, investors have a hard time pinning down when they were sold and how the advances were recouped.
"Reporting of subsequent recoveries on liquidated loans is not very clear," BarCap said, adding that sometimes it is due to representation and warranties buyouts or even mortgage insurance payments, but "investors are left guessing the exact source of these recoveries."
Even servicer fees are misaligned, BarCap said. These fees, along with robo-signing and high-touch strategies, are a touching point as regulators develop a national mortgage servicing standard. Some, such as Amherst Securities
, have said
the old way of servicing a nonperforming loan at a performing loan rate has cut any incentive to effectively work out a troubled mortgage.
According to BarCap, some changes are needed if just to clear up how servicers are paid from an investor point of view. They suggested servicers move to provide more details at the loan level and the inclusion of a data dictionary that describes each line item and its source clearly.
"In the longer term, a completely revamped reporting structure needs to be adopted that takes a standardized approach for various cash flows," BarCap said. "Some of the changes may already come through regulations as the SEC takes a closer look at deal structures and cash flows."
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