The rapid transfer of servicing obligations can take a toll whenever a new mortgage servicer unexpectedly sees losses stemming from issues that developed before it took over the servicing function.
Analysts with Moody’s Credit Outlook provided a perfect example of this, saying last week $1 billion in losses "were retroactively" recognized on 170 U.S. residential mortgage-backed securitizations due to losses from principal forbearance modifications enacted by the loans' previous servicer, Homeward Residential Inc.
Those actions were taken prior to July 2012, but they didn’t shock the new servicer, Ocwen Loan Servicing, until last week. Ocwen took over the servicing in December 2012 without realizing the existing risk.
"The delay in recognizing losses allowed mezzanine bonds to continue receiving interest payments, thereby reducing excess spread available to amortize more senior bonds," said Moody’s in its latest credit outlook. "The sudden write-down also affects some senior bonds whose payment priorities are now more likely to change earlier than previously expected."
Moody’s says in 50 of the deals, losses reached above $10 million each.
About 13 transactions saw losses exceed $30 million each, while another 57 transactions saw losses in the $1 million-to-$10 million range.
Moody’s says Home Affordable Modification Program guidelines from 2009 require servicers to treat any forborne principal on loan mods as realized losses. For the deals in question, that didn't happen until last month.
Ocwen calls it an unusual one-time occurrence and does not expect more losses from old forbearance modifications, Moody’s claims.
Issues related to the transfer of servicing assets have concerned ratings agencies for a while. The questions ratings analysts often ask revolve around how easy it is to board, streamline and manage massive servicing transfers at once.
The Consumer Financial Protection Bureau even released guidance in February giving servicers a heads up on how to safely transfer MSRs — a move that showed growing impatience with some of the risks associated with the process.