In the top U.S. states for home foreclosures loans serviced by banks experience higher losses than those serviced by non-bank entities, Moody’s Investors Service says in a new report.
Moody’s report compares loss severities on loans serviced by banks and those serviced by non-banks in Florida, New York and New Jersey over the past 12 months. These three states account for 42 percent of all sub-prime loans in foreclosure in private-label residential mortgage-backed securities (RMBS), and in all three loss severities on bank-serviced loans were found to be more than 10 percent higher than they were on loans serviced by non-banks.
“One of the main reasons bank-serviced loans see higher losses than non-bank-serviced loans is that the former usually have longer foreclosure timelines due to regulatory settlements,” said Moody's Vice President, Senior Credit Officer William Fricke. “The additional time needed to process foreclosures led banks’ foreclosure inventories to grow, while non-bank servicers did not initially face the same scrutiny, keeping their inventories smaller and their foreclosure timelines shorter.“
Bank-serviced loans saw higher losses because longer timelines increase expenses to the RMBS trusts that hold the loans, Fricke says in a special section of Moody’s second-quarter Servicer Dashboard titled “Loss Severities Are Higher for Bank-Serviced Loans than Non-Bank-Serviced Loans.” Such expenses include principal and interest advances on delinquent loans, tax and insurance payments, attorney fees and property maintenance costs.
Non-bank servicers’ foreclosure timelines did eventually lengthen with the establishment of the Consumer Financial Protection Bureau (CFPB) and the adoption of the National Mortgage Servicing Standards, both of which affected the entire mortgage-servicing industry, Moody’s says. But because they still have a large pipeline of loans in foreclosure, bank servicers’ losses will remain higher than non-bank servicers’ through 2017 as both bank-serviced and non-bank serviced loans move slowly through the liquidation process.