Residential mortgage subprime loans in foreclosure serviced by banks experienced higher losses than loans serviced by non-bank firms in the top three foreclosure states over the last 12 months, according to a report from Moody’s Investor Service.
The Moody’s report compared loan loss severities for both banks and non-bank entities in Florida, New York, and New Jersey for the past year. Loss severities on loans serviced by banks were reported to be more than 10 percent higher than loss severities on non-bank serviced loans in those three states, which accounted for 42 percent of all subprime loans in foreclosure in private-label residential mortgage-backed securities.
"One of the main reasons bank-serviced loans see higher losses than non-bank-serviced loans is that the former usually have longer foreclosure timelines due to regulatory settlements," VP—Senior Credit Officer William Fricke said. "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 timelines shorter."
"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 timelines shorter."
Loans serviced by banks have longer foreclosure timelines, which increase expenses to the RMBS trusts that hold the loans, therefore causing higher losses on those loans. Those expenses include principal and interest advances on delinquent loans, tax and insurance payments, attorney fees, and property maintenance costs.
According to Moody’s, the establishment of the Consumer Financial Protection Bureau and the adoption of the National Mortgage Servicing Standards caused foreclosure timelines to lengthen for non-bank mortgage servicers, according to Fricke. However, losses on loans serviced by banks are expected to remain higher than those serviced by non-bank serviced entities through 2017 due to the large pipeline of loans in foreclosure for bank servicers as loans serviced by both banks and non-banks move slowly through liquidation, Moody’s reported.
Click here to read the full report.