| 2 More Lenders Under Predatory Servicing Microscope
Fitch source warns about modifications October 20, 2004 By NEIL J. MORSE |
| The growing loan servicing practice of modifying borrower repayment terms is being watched closely by ratings agencies in the wake of two, high-profile government cases this past year.
In particular, two companies — one relatively large, the other midsize — reportedly are under scrutiny for potential violation of government servicing practices in modifications they are reputedly permitting. According to a source at Fitch Ratings in New York, two major servicing organizations are being closely scrutinized a year after Fairbanks Capital Corp. was cited for servicing violations, and settled with the Federal Trade Commission and U.S. Department of Housing and Urban Development; and six months since Ocwen Federal Bank implemented measures contained in an Office of Thrift Supervision supervisory agreement. “The use of modifications is developing as an issue,” the source said, because “predatory lending has become such a sensitive issue that lenders and servicers are giving borrowers more opportunities on forbearance.” As a result, more modifications, i.e., revised loan terms, are being offered to troubled borrowers; these new terms include reduced rates and debt forgiveness. Of concern to the ratings agency are alterations in the cash stream for investors that may result from these liberalizations. Questions arising include how servicers would report attendant losses when a loan is modified or debt is forgiven. “How are those loans passed through to the transaction?” the Fitch source asks, noting that “they have to be reported [because] investors depend on default numbers as well as loss numbers.” Some companies are much slower to address these issues, according to the source, who reported that Fitch is “accelerating some review dates” to ensure that “attention put to this.” There is some worry that loan term changes “may not make sense for the borrower,” the source says, and there is doubt that the original loan terms even permit some of the modifications being offered. “If you modify [the terms] and they still can’t afford it you’re just increasing costs, so it has to truly be a one-time transaction,” says the source, who maintains that proper modification “takes re-underwriting of the loan and a re-analysis of the borrower’s true conditions.” Chastened by the Fairbanks and Ocwen settlements, servicers are more likely to want to avoid foreclosure, if at all possible, says the source. “But where foreclosure is called for it may be unnecessarily delayed by modifications. Although the charges set forth in the Fairbanks and Ocwen cases were not intended to put all servicing companies on notice, many have reacted as if those expectations were now “fenceposts,” delineating firm boundaries on what they can or cannot do. The consensus is that such is not the case, however every servicer is advised to carefully review these settlements and establish controls to avoid similar transgressions. In essence, says the Fitch source, “servicers should look at their practices and ask themselves: ‘How would regulators look at what we’re doing?'” |
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Neil J. Morse is a communications consultant and independent writer working exclusively in the mortgage finance industry. He resides in Newtown, Conn. and may be reached by e-mail at:Â morse@ntplx.net |
