Residential mortgage-backed securities servicers do not report losses from principal forbearance loan modifications consistently from servicer to servicer, a new Fitch report says.
The ratings agency reports that the timing of putting losses on the books varies from company to company, usually at the time of the modification, but sometimes not until the loan is liquidated. Fitch estimates that approximately 1.5 million private RMBS loans were modified between June 2009 and June 2014.
Fitch found that servicers typically report modification losses when they happen if modified through the federal government’s Home Affordable Modification Program. About 33% of the RMBS loan modifications made between the above points in 2009 and 2014 were HAMP modifications, with the rest falling under a proprietary program.
Fitch found that some servicers take different approaches when modifying under proprietary programs, delaying loss reporting until the loan is liquidated. According to Fitch, the difference in approach depends upon pooling and servicing agreements.
“If a borrower is eventually able to pay off the loan in full (including the forborne principal),” the report reads, “a loss may never be reported.”
Fitch also admits that the discrepancies in reporting may affect subordinate bonds, in that they could remain outstanding longer than if the loss were realized at the time of the modification. Still, Fitch says, “delayed loss recognition will have minimal ratings pressure.”