Servicing of Delinquent Subprime Loans Improves

The overall efficiency of the nation’s servicers of delinquent subprime loans improved modestly during the second quarter, reinforcing a recent trend that is likely to continue, according to Moody’s.

Moody’s Cash Flow Efficiency Metric increased to 0.29 in the second quarter of 2012 up from 0.27 in the first quarter indicating the cash flow servicers received from delinquent loans was higher than related losses.

The metric shows that subprime servicer efforts to improve cash flow by increasing the number of loan liquidations through short sales and deed-in-lieu and modifications are working.

Moody’s Cash Flow Efficiency Metric measures the ratio between the amount of cash revenue servicers collect on modified and liquidated delinquent loans compared to the losses they incur due to loan principal reduction based modifications and property liquidations.

The higher the metric, the more efficient servicers are in generating cash flow from delinquent loans.

During the second quarter the metric reached its highest level since the second quarter of 2011. The increase however is not substantial, analysts wrote, since it “has been hovering in the 0.27-0.29 range over most of the last two years.”

Increased liquidation and modification volumes drove the improvement, analysts wrote, mainly due to an increase in property liquidations, “which rose to their highest level over the past several years,” accounting for 2.6% of delinquent balances in the second quarter, up from 2.2%.

The improvement also reflects an overall reduction in the number of delinquent loans in the liquidation pipeline, since the metric adds to each month’s actual realized losses Moody’s assumptions for future liquidation losses on the delinquent loans in the pipeline

Lower loss severities on liquidated properties compensated for an increase in actual loan losses from liquidations.

Modifications also helped lower the number of delinquent loans in the pipeline. The average monthly modification rate increased slightly to 2.6% of delinquent balances in the second quarter from 2.4% in the previous quarter.

Another factor is principal reduction. Analysts found that subprime loan modifications reduce the monthly payment by an average of about 35% of the initial payment, leading to “a smaller loss than implied by the average servicer metric of 0.29.” Hence, an increase in the volume of loan modifications “tends to boost servicers’ cash flow efficiency.”

Cash-flow efficiency during the second quarter increased for nearly all of the servicers tracked by Moodys.

As expected Ocwen and GMAC lead the way.

Ocwen improved the servicing efficiency of its longstanding loan portfolio to 0.37, up from 0.33 in the first quarter of this year. In the second quarter Ocwen also improved the cash-flow efficiency in the portfolios it acquired from Litton, to 0.25 from 0.22, and Saxon, to 0.27 from 0.24.

Ocwen has proficiently handled its high loan volume improving its servicing efficiency for both its own longstanding portfolio and recently acquired portfolios of Saxon, which Ocwen started acquiring in increments beginning in November 2011, and Litton, which Ocwen acquired in September 2011.

GMAC’s cash flow efficiency improved, to 0.39 from 0.35. Ownership uncertainty did not lead to “staff attrition or performance deterioration typical in financially distressed servicers,” analysts wrote. Even though GMAC’s corporate parent, Residential Capital Funding LLC, filed for Chapter 11 bankruptcy protection on May 14 GMAC’s efficiency has remained high.

How the nation’s top five servicers are performing following the state attorneys general settlement in April 2012 remains an industry concern.

The metric shows Bank of America is performing better than peers in this group.

B of A improved its servicing performance in recent quarters by significantly increasing the volume of short sales. Since it signed the AG settlement B of A has resolved more delinquent loans through short sales than Chase, Wells Fargo, CitiMortgage and Ally Financial combined, analysts wrote.

These insiders attribute at least part of the improvement in B of A’s efficiency to the growing portion of highly delinquent loans it has subcontracted to special servicers with smaller, more manageable portfolios.

Going forward, B of A’s servicing efficiency is likely to improve further “if it steps up loan modifications in order to meet the target volume outlined in the settlement,” they added.

Chase on the other hand is one of the major servicers lagging behind in cash-flow efficiency. During the quarter the metric declined to 0.27 from 0.28.

Some servicers are suffering the consequences of recent mergers and acquisitions.

For example, in the second quarter, Aurora had the sharpest decline in efficiency, to 0.30 from 0.34 in the previous quarter, because it is still awaiting the transfer of its portfolio to Nationstar.

Due to the merger Aurora saw a 2.3% decrease in loan modifications down from 2.7%, combined with an increase in loss severities on liquidated properties to 67% up from 63%, which ultimately drove Aurora’s efficiency metric down.

Nationstar’s acquisition of Aurora’s portfolio caused staff “uncertainty regarding their employment” and is a plausible reason why the number of loan modifications decreased during the quarter. Analysts expect Aurora’s servicing efficiency will further weaken after Nationstar completes the transfer.


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