Investors Can Trim Losses by Discriminating Between Servicers: Report

The ratings agency Standard & Poor’s says investors can cut their losses by basing servicer selection on key performance metrics of default management.

The company has come up with a new method to assess residential mortgage servicer performance that looks at how the speed of the servicers’ foreclosure processes and the success of their loan modification programs affect investors’ losses on nonperforming loans.
S&P says it’s found “significant differences” among 10 of the largest servicers – differences that could save investors up to 7.3 months of interest payments on loans that eventually default.
Servicers’ average liquidation speeds can differ by several months, according to S&P, leading to variations in loss severity primarily due to differences in the number of payments borrowers miss.
Loan modification programs can also have a big impact on overall losses from a loan pool, S&P says. Servicers’ rates of successful modifications, as a percentage of all nonperforming loans, ranged from 3 percent to 18 percent for the servicers in S&P’s sample.
The ratings agency did not list the servicers by name in this inaugural performance assessment study, although it intends to do so in future reports.
“The continuing slump in the U.S. housing market has highlighted the crucial role of mortgage servicers, which
administer all aspects of these loans — from collecting payments, to modifying troubled loans, to proceeding with foreclosures and property liquidations when borrowers default,” S&P said in its report.
“Ultimately, a mortgage servicer’s success from an investor perspective boils down to defaults within its portfolio of mortgages and the speed and volume of any recoveries it can achieve on those loans,” S&P noted.
The ratings agency noted that both foreclosure frequencies and loss severities are functions of a myriad of factors, and many of those factors are out of the servicer’s control — including the loan-to-value (LTV) ratio, state-specific foreclosure requirements, and the quality of the underwriting at origination, as well as changing property valuations in a volatile market.
For this reason, S&P looked at each servicer’s speed through the foreclosure and resolution process against averages for the related states and loan types, as well as the success of the servicer’s loan modification program.
Long foreclosure periods typically increase losses due to the interest advanced each month, as well as taxes and insurance that may need to be paid and property preservation costs.
To complement its analysis of liquidation speeds, S&P also assessed the success of each servicer’s loan modification programs. Overall, the agency found that “loan modifications were successful more often than not.” On average, S&P found about 60 percent of modified loans were still current 12 months after being modified.
S&P says the extent to which servicers are able to modify loans — and the terms of those modifications — can vary based on servicing agreements and government program rules.
“While these factors limit the efficacy of modification success rates as a measure of a servicer’s overall success, we believe that paired with liquidation speeds, these factors help provide a more complete picture of the merits of the various servicers’ strategies,” S&P said.