Outlook Negative for U.S. RMBS Servicer Sector
Fitch Ratings-New York-04 November 2010: Fitch Ratings has assigned a Negative Outlook for the entire U.S. Residential Mortgage Servicer ratings sector on increased concerns surrounding alleged
procedural defects FELONIES in the judicial foreclosure process.
‘Risks to servicers include cost to research and remediate any errors, additional fees and resources, potential penalties and reputational risk,’ said Diane Pendley, Managing Director and head of U.S. RMBS Operational Risk for Fitch.
This industry-wide issue will cause all servicers to be under increased scrutiny from a wide range of state and federal regulators, state attorneys general, and GSE’s. All servicers will be affected, even those fully in compliance with all foreclosure rules and regulations. 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.
Fitch’s Rating Outlooks indicate the likely direction of any rating change over a one- to two-year period and may be Positive, Negative, Stable or, occasionally, Evolving.
Fitch has received responses to its recent survey from all of its rated servicers regarding the servicers’ specific internal procedures used to verify and execute foreclosure affidavits. All servicers have indicated that they are taking this matter seriously and have reviewed or are in the process of reviewing their internal procedures used to verify and execute foreclosure affidavits.
Approximately one-third of Fitch’s rated servicers have completed their reviews of foreclosure processes and the accuracy of their foreclosure affidavits.
These servicers do not believe they will need to take any corrective action or make any changes to their current processes at this time. Some servicers have estimated that they will be able to complete their review within the next several weeks, while others are still unable to give a specific estimate of how long it may take to complete their reviews.
However, ‘all servicers appear to be working towards quantifying and defining their position on foreclosures,’ said Pendley. Therefore, Fitch expects all servicers will have substantially completed their internal reviews by the end of the fourth quarter.
Based on the research that the servicers have completed to date on these issues, all servicers generally maintain the factual accuracy of their affidavits.
However, some have found their procedures for reviewing, signing and notarizing foreclosure documents may require changes and corrective actions. Some servicers have announced publicly that they have halted certain foreclosure and liquidation actions until their reviews are completed.
Many servicers have also stated that they will be resuming the foreclosure and liquidation actions in identified jurisdictions as they complete their reviews and determine that their processes are adequate and any needed corrective actions have been taken.
Fitch has requested its rated servicers to provide estimates on the volumes and timeframes for submitting corrected affidavits when it is found to be necessary and as this information becomes available. However, the servicer’s ability to resolve each
corrective action FELONY at the local court level will create a wide variety of remedial steps and associated timeframes. ‘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.
Fitch has discussed with its rated servicers their ability to track and segregate the additional costs associated with taking any corrective actions.
If corrective actions are needed because of a servicer error, any increased costs should be borne by the servicers and not passed through to the trusts.
These increased costs may include legal costs to correct and file new or amended foreclosure documents and the increased carrying costs for the extended foreclosure and liquidation timelines.
Fitch may place an individual servicer’s ratings on Rating Watch Negative and/or downgrade the ratings if the servicer does not diligently and timely review its processes and take immediate corrective action to remediate any foreclosure action or documentation
failures FELONIES. Fitch may take similar actions on a servicer’s ratings if the impact of the additional costs that must be borne by the servicer significantly affects its financial condition. Until those conclusions are reached, the Negative Outlook on the sector impacts all U.S. RMBS servicers.
An increase in loss severities on liquidated loans from expected trend lines or any downgrades to servicer ratings may result in negative rating actions on related RMBS classes. As a direct by-product of the recent foreclosure
issues FELONIES, Fitch currently expects any negative rating actions on RMBS tranches to be limited largely to non-investment grade classes and tranches that currently have a Negative Rating Outlook. Additionally, Fitch does not envision RMBS downgrades to exceed a single rating category in most cases.