Reports that servicers Ocwen (OCN) and Nationstar (NSM) had to report steep losses on principal forbearance modifications creates a downside for residential mortgage-backed securities investors.
Yet, these incidents most likely represent the worst of what’s to come on this issue, claims Diane Pendley, managing director at Fitch.
Confusion over how to account for principal forbearance resulted in $1 billion in surprise losses on mortgage bonds backed by Nationstar-serviced loans, analysts reported this week.
In May, Ocwen also reported $1 billion in reclassified principal forbearance losses.
While Pendley limited the worst of these losses, Fitch and Pendley elaborated on the issue this week.
“The recent increase in servicing transfers has revealed reporting inconsistencies between servicers,” said Managing Director Diane Pendley. “Principal forbearance reporting has become a concern for RMBS investors especially those sensitive to the timing of losses, though we’ve likely seen the worst of the trend with Nationstar and Ocwen.”