Fitch Ratings an international credit rating agency has released a special report discussing the various loss mitigation strategies currently being utilized and their effects.

Fitch: U.S. RMBS Servicers Scrambling To Curb Loan Losses

Increasing numbers of stressed mortgage loan borrowers are turning to RMBS (Residential Mortgage-Backed Security) servicers for assistance in helping them keep their homes or assisting them with the sale of the property when they cannot afford to keep it. Fitch Ratings discusses the various loss mitigation strategies currently being utilized and their effects in a new report.

A recent survey conducted by Fitch indicated that subprime servicers have historically used payment plans to resolve defaults in approximately 50% to 75% of the cases. However, the survey showed that the effectiveness of repayment and forbearance plans is decreasing. In addition, payment plans are not expected to work for some borrowers facing ARM resets, because they will not be able to afford the new monthly payment. Conversely, short sales and deeds-in-lieu (which reduce foreclosure and eviction costs and timelines) are being used more frequently.

Though foreclosure liquidation is seen as the least beneficial strategy, it may be the only recourse in some instances as the servicer is responsible to RMBS investors to minimize losses.

Loan modifications are steadily becoming more prevalent as a viable alternative to foreclosure. However, they can directly affect an RMBS pool's cash flow and potentially result in rating downgrades if not used in a controlled manner and reported properly. Based on projections from servicers Fitch believes that over the next 12-18 months, modifications could be used on as many as 5%-10% of the loans, based on the original outstanding balance of the deal, and could be the only viable loss mitigation strategy for as much as 40%-50% of the loans in default or determined to be a reasonably foreseeable default scenario.

Fitch also announced amendments to its rating criteria for U.S. subprime RMBS/HEL ABS to reflect the increased use of loan modifications (click here). The changes will go into effect for new transactions closing in August 2007.

To view the online Press Release please click here.

To view the online Analysis please click on the following link.

Changing Loss Mitigation Strategies for U.S. RMBS

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