Boy, if Fitch thinks servicer problems are limited to affidavits, it is gonna learn a lot more in the coming weeks and months. This report comes via BusinessWeek:
Fitch Ratings said Wednesday it’s asking mortgage servicers about their foreclosure practices in the wake of GMAC Mortgage LLC’s recent disclosure of procedural errors.
The agency believes that if more errors are found by other servicers, that could stall foreclosures in some states and increase losses related to residential mortgage-backed securities. That could prompt Fitch to downgrade ratings on servicers that are affected, the agency said.
“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,” wrote Diane Pendley, managing director at Fitch.
The procedural errors involve affidavits verifying who owns the mortgage note. Fitch is reviewing each servicer’s internal process for executing foreclosure affidavits. If it finds the process is lacking, Fitch will consider lowering the servicer’s rating.
This looks reactive and appears to reflect an incomplete understanding of the problem. In judicial foreclosure states, certain affidavits were required as part of the documentation needed to proceed with a foreclosure. If the affidavits were improper, they are a fraud on the court.
In non-judicial states, the same problem arises when a foreclosure is challenged. A non-judicial process moves into the court system. Bankruptcy filings routinely lead to a motion for relief the bankruptcy stay (legalese for the servicer asking to grab the house now rather than let what happens to the homeowner borrowings be resolved by the judge). So you have similar issues in non-judicial states. not just as prevalent.
In addition, as we have indicated, the affidavit problem is only one of type of servicer/mortgage mill impropriety. There is increasing proof that foreclosure mills engaged in widespread document fabrication to show that trusts (the securitization entity) owned the note (the borrower IOU), when it fact it had not been properly conveyed to them, and retroactive fixes create problems under New York trust law and the provisions of the pooling and servicing agreement that governs the securitization.
But it isn’t clear what this means for bond ratings, since servicers are not stand alone entities with rated debt but live in larger entities. Servicing historically has been at best a low margin, often a breakeven business; of late, servicing has been a cash flow negative activity. Tom Adams comments:
Note that Fitch is talking about its “servicer ratings”, which are an operational assessment of the way servicers do their job, and have their own separate scale. In the past, the main purpose of the servicer ratings was to create an adjustment, up or down, based on the quality of the servicer’s operations [servicing entity], on new MBS credit enhancement requirements. Since very few MBS are being issued currently, I am not sure how Fitch uses the ratings now.
Of course this could be a preview (even if Fitch doesn’t realize it yet) – we may see the corporate bond ratings of the banks that own large servicing companies start to get downgraded as a result of these servicing problems.