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Settlement’s Impact on Foreclosures and Principal Reduction: Fitch

The most significant impact of the $25 billion robo-signing settlement has been the clarification of foreclosure standards for servicers, which has led to a higher number of initiated foreclosures, ""Fitch Ratings"":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp said in a note.

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In February, state and federal officials reached a landmark settlement with five of the largest servicers - Bank of America, JPMorgan Chase, Wells Fargo, Citi, and Ally â€" over foreclosure practices.

While the settlement was being negotiated, many lenders put foreclosures on hold while awaiting the final terms. Now that the settlement is over, servicers are moving forward with the foreclosures.

""Foreclosure initiation rates have risen to their highest level in three years, a sign that the settlement may have provided servicers greater regulatory clarity, thus allowing them to act more decisively,"" said Grant Bailey, managing director for Fitch.

According to Fitch, foreclosure initiation rates rose to roughly 12 percent in June, the highest figure since first half-2009.

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As for private-label RMBS performance, the rating agency said the settlement's impact so far has been marginal, but the full impact on RMBS transactions can't be realized just yet. For one, Fitch said servicers still need to fully implement programs and procedures included in the settlement.

One requirement through the settlement includes principal reductions for underwater borrowers at risk of default. Out of the $25 billion, $10 billion was allotted for principal reductions.

While there has been an increase in principal reductions, Fitch said the growing use of principal reduction may be a continuation of an earlier trend, not a result of the settlement, since activity of servicers not included in the settlement is similar to those in the settlement.

About 30 percent of loan modifications in June included a principal reduction, up from roughly 20 percent in February, according to Fitch. That figure was increasing prior to the settlement, and was up from 10 percent at the start of 2011, the rating agency said.

Fitch said it views strategic defaults as an ongoing concern, but there doesn't seem to be any sign yet of an increasing trend with underwater borrowers attempting to strategically default to qualify for a principal reduction.

""Although still early, there has been no evidence of servicers applying principal reductions disproportionately to private-label RMBS deals or of any increase in strategic borrower defaults,"" said Bailey.

Instead, the opposite seems to be occurring, with the current-to-delinquent monthly roll rates for underwater borrowers improving slightly since the settlement.

The rate of those who rolled from current to delinquent decreased since February from 3.1 percent to 2.8 percent in June, according to Fitch. This rate of improvement though was occurring prior to the settlement.

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