Mortgage servicing improves in RMBS

Servicing strategies of UK non-conforming lenders have developed rapidly since the onset of recession and continue to evolve to reflect the changing economic landscape, according to Fitch Ratings.

"Fitch rates a number of residential primary and special servicers across the UK, and has noted that the increased focus on Treating Customers Fairly and other regulatory and government initiatives over the past 12 to 18 months has led specialist lenders and servicers to amend their arrears and foreclosure strategies," said Robbie Sargent, director of Fitch's European Structured Finance team.

The timeline of a typical UK residential mortgage foreclosure process has extended by three months to 12 to 15 months compared to a year ago.

Pre-2008 possession proceedings were typically started after two missed payments, now it is usually after three to four months of missed payments. Servicer staff are encouraged and incentivised to make realistic ‘arrangements to pay’.

The Financial Services Authority recently announced an investigation into four firms in relation to their arrears handling techniques, citing an approach focused too strongly on arrears recovery, without reference to the borrower's individual circumstances. It is not clear whether these firms are third party administrators or specialist lenders who originated the loans and are now acting as the named servicer on RMBS (residential mortgage-backed securities) transactions.

Where RMBS legal documents allow, some special servicers have instigated loan modification programmes which help borrowers falling into default while at the same time maintaining the maximum cash flow possible into any RMBS.

The process requires discussion with the borrower and a thorough understanding of their finances in order to agree the most appropriate loan modification. Typically, this can include an extension of loan maturities, changing the repayment method, capitalisation of arrears and/or deferral of payments.

These measures have only become more widespread in the UK non-conforming sector since early 2008, and although still in the early stages of implementation, a number of successful modifications have enabled borrowers to remain in their homes.

It is too early to have re-default rates for modified UK loans, but the high level of re-defaults in the US (up to 70%) shows the difficulty of successfully implementing such schemes.

This highlights another problem surrounding the loan modification programme - if the borrower (or servicer) is only delaying the inevitability of possession by agreeing to a loan modification that is unrealistic, in the current declining house price environment, the loss on the sale could be larger and only add to the borrower's long term debt.

"Clearly mortgage defaults will continue to be prevalent during the recession. However, servicers are more geared up than before to tackle rising arrears. A continued investment in staffing and training, along with more emphasis on Treating Customers Fairly, should help to mitigate increasing possessions," said Sargent.

"It is wrong to assume that because a loan has been securitised it is more likely to be pushed through to possession in the event that it falls into arrears," said Alastair Bigley, director in Fitch's European Structured Finance team.

"It is in the interests of investors in RMBS that servicers adopt strategies that minimise ultimate losses. Servicers are in the best position to judge whether loan modification is the best means of achieving this. Certainly with interest rates at their current low levels, a servicer's flexibility to make this decision is greater than in the early 1990s recession."