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Losses Greater on Bank-Serviced Subprime Mortgages

Investors on securitized subprime mortgages might have better returns if their loans are serviced by non-banks than by financial institutions.

On securitized subprime home loans that are serviced by banks, loss severities are 10 percent worse than on loans serviced by non-banks.

The findings are based on loans secured by properties in Florida, New Jersey and New York
that are included in residential mortgage-backed securities.

Moody’s Investors Service, which reported the findings in its Servicer Dashboard Second Quarter 2015, noted that 42 percent of subprime loans that are in foreclosure are located in the trio of states.

Moody’s Vice President – Senior Credit Officer William Fricke explained in the report that the driving factor behind the disparity is that banks usually have longer foreclosure time-lines due to regulatory settlements.

“The additional time needed to process foreclosures led banks’ foreclosure inventories to grow, while non-bank servicers did not initially face the same scrutiny, keeping their inventories smaller and their foreclosure time-lines shorter,” Fricke stated.

He said that losses are higher on bank-serviced loans because longer foreclosure time-lines increase expenses to the RMBS trusts holding the loans.

The added expenses include principal and interest advances on delinquent loans, tax and insurance payments, attorney fees and property maintenance costs.

However, the ratings agency report indicated that foreclosure time-lines have lengthened for non-bank servicers thanks to the establishment of the Consumer Financial Protection Bureau.

Also adding to non-bank time-lines was the
adoption of the National Mortgage Servicing Standards.

“But because they still have a large pipeline of loans in foreclosure, bank servicers’ losses will remain higher than non-bank servicers’ through 2017 as both bank-serviced and non-bank serviced loans move slowly through the liquidation process,” Moody’s said.

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