Alleged procedural defects in the judicial foreclosure process implemented by servicers may stall the foreclosure process in some states and ultimately lead to increased loss severities for residential mortgage-backed securities (RMBS), according to Fitch Ratings.
High loss severities already projected on defaulted loans in these states will limit the initial magnitude of any negative rating actions for outstanding Fitch-rated RMBS with heavy exposure to affected states. However, these probes may highlight weaknesses in the processes, controls and procedures of certain RMBS servicers and may lead to servicer rating downgrades by Fitch, the firm says.
While most of the coverage on this issue has focused on GMAC Mortgage Services to date, ‘Any servicer with a significant portion of their portfolio in judicial foreclosure states will be either directly or indirectly impacted by the attention focused on this problem,’ says Diane Pendley, managing director and head of U.S. RMBS Operational Risk for Fitch.
The key risk identified has been foreclosure affidavit data-accuracy concerns due to improper controls maintained by servicers in verifying the information in the affidavit. While servicers have historically maintained quality-control processes to ensure that affidavit data presented is cross-checked and accurate, these processes have proven to be deficient in some cases. This is either due to operational constraints caused by the heavy foreclosure volume that is being processed, oversight or training limitations, or other factors.
Fitch is currently contacting its rated servicers regarding their specific internal processes used to review and execute foreclosure affidavits to determine if any newly implemented or planned changes are under way as a result of these recently disclosed concerns.
‘If Fitch's review determines that a servicer's processes are not adequate and remedial actions are not sufficiently robust, Fitch will take rating actions on the respective servicer's ratings,’ Pendley adds.
SOURCE: Fitch Ratings