Moody's Ranks Subprime Servicers Based on Cash Flow

Based on a metric devised by Moody’s, GMAC, SLS, and American Home Mortgage Servicing performed better compared to other subprime servicers in terms of cash collected relative to losses on delinquent loans. This was mainly due to shorter liquidation timelines that resulted in lower loss severities on foreclosed properties, according to an article in Moody’s ResiLandscape for April.

The article, authored by Moody’s analysts Jiwon Park and Peter McNally, ranked eight servicers – GMAC, American Home Mortgage Servicing, Ocwen, Aurora, Select Portfolio Servicing, Wells Fargo, Chase, and BAC Home Loans Servicing – across a timeline spanning from 2010 to February 2012 for cash flow efficiency.

After weighing how much cash the servicers generate from modifications and liquidations against how much is lost, each major servicer was ranked. GMAC, SLS, and American Home were consistently top ranking, while Ocwen was in the middle, and BAC and Chase ranked near the bottom.

According to the article, GMAC’s high metric is due primarily to shorter liquidation timelines and because the servicer maximizes cash flow on modified loans by keeping the re-default rates in line with the industry average even though it offers relatively low levels of relief in terms of principal and interest.

Ocwen actually had a consistently high cash flow because it actively modifies loans while keeping cash flow coming with fewer delinquent loans. However, the article notes that Ocwen’s success will depend on the re-default rate of the modified loans.

Bottom-ranking BAC was not as efficient due to low volumes of modified loans and liquidated properties, leading to higher loss severities.

The Moody’s article also pointed out that cash flow is much lower in judicial states due to longer foreclosure timelines and greater loss severities. The article stated that since the rank order for servicers in both judicial and non-judicial states patterned after the overall ranking, this suggests that “judicial delays do not unduly affect the less efficient servicers.”



By: Esther Cho