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Should Servicers Report Principal Forbearance Losses Now or Later?

Principal forbearance, a loan modification practice in which a loan servicer allows a borrower to delay payment on his/her loan for a specified period of time, apparently poses an accounting conundrum.

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Just as ""Fitch reported"":http://dsnews.comarticles/fitch-notes-inconsistencies-in-forbearance-reporting-losses-at-nationstar-2013-07-02 this week that servicers do not all report principal forbearance losses in the same manner, ""Moody's Analytics"":http://www.moodysanalytics.com/ also took note of this fact in its most recent _ResiLandscape_ report.

While some servicers report forborne principal as a loss at the time of the loan modification, others wait until the time of liquidation.

Treasury requires servicers to report losses at the time of modification on all loans modified through the ""Home Affordable Modification Program (HAMP)"":http://www.makinghomeaffordable.gov/programs/lower-payments/Pages/hamp.aspx since June 2010, but

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non-HAMP loans are still open to the discretion of each individual servicer.

Ocwen, Bank of America, Wells Fargo, and One West all report forbearance amounts as losses at the time of the loan modification.

However, Green Tree and former ""Aurora Commercial Corporation"":http://www.auroracommercial.com/ â€" which passed its portfolios on to Nationstar and Selene Finance--postpone the reporting of losses on loans with principal forbearances.

Delayed reporting of these losses often negatively impacts residential mortgage-backed securities. However, [a] limited number of bonds have benefitted from the late realization of forbearance losses, such as senior bonds whose payment priority shifts following a depletion of credit support,"" according to Moody's.

Nationstar just reported an additional $1 billion in losses on loans it acquired from Aurora, which did not report principal forbearance amounts on the loans.

Ocwen also recently announced $1.4 billion in losses it discovered on loans it acquired from Homeward Residential Inc., which did not report losses on 177 non-HAMP modifications that took place before July 2012.

Wells Fargo is also set to report newly discovered losses due to unreported principal forbearance losses, according to Moody's.

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