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Moody’s Downgrades Ocwen Loan Servicing

Moody’s Investors Service has downgraded Ocwen Loan Servicing, LLC’s servicer quality (SQ) assessments as a primary servicer of subprime residential mortgage loans to SQ3+ from SQ2- and as a special servicer of residential mortgage loans to SQ3+ from SQ2-. Both assessments remain on review for further downgrade. The ratings agency also lowered the company’s component assessment for loan administration to average from above average.

Moody’s SQ assessments represent its view of a servicer’s ability to prevent or mitigate asset pool losses across changing markets. Moody’s servicer assessments are differentiated in the marketplace by focusing on performance management. The assessment scale ranges from SQ1 (strong) to SQ5 (weak).

In Moody’s last SQ assessment of Ocwen, on 21 August 2013, Moody’s maintained the company’s SQ2- assessment as a primary servicer of subprime loans and its SQ2- assessment as a special servicer of residential mortgage loans. Both SQ assessments remained on review for downgrade owing to concerns about Ocwen’s rapid portfolio growth and the challenges of integrating the acquired servicing platforms and managing the additional distressed loan portfolios.

The assessment action reflects the heightened regulatory scrutiny of Ocwen Financial Corp. by the US Securities and Exchange Commission (SEC) and the New York Department of Services (NYDFS). Based on their findings, these agencies could restrict Ocwen’s activities, levy monetary fines, or take additional actions that could negatively affect the company’s financial strength and servicing stability.

The assessment action follows Ocwen Financial Corp’s announcement on 18 August 2014 that it had received a subpoena from the SEC in June seeking documents related to its business dealings with corporate affiliates and a probe related to the interests of the executives in the companies. The NYDFS on 4 August 2014 also issued a letter to Ocwen that raises concerns about potential conflicts of interest and potentially inconsistent statements and representations regarding corporate governance.

Moody’s also lowered the company’s component assessment for loan administration to average from above average based on regulatory concerns regarding force-placed insurance fees and the role of Altisource Portfolio Solutions, S.A. in the planned implementation of Ocwen’s new force-placed insurance program. Ocwen also has embarked on an initiative to review all loan-related imaged documents to identify duplicate documents, index documents that are not appropriately classified and reimage documents, which are not legible. Ocwen expects the effort, which should improve the quality of servicing, to be completed in approximately one year.

The review for downgrade for the special servicer and the subprime servicer assessments reflects Moody’s continuing concerns about Ocwen’s challenges integrating the acquired servicing platforms and managing the distressed loan portfolios. It also reflects uncertainty regarding the impact of the regulatory scrutiny and possible regulatory actions on the company’s servicing stability.

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The Impact Of The QM Rule

US residential mortgage-backed securities (RMBS) backed by non-qualified mortgages will incur higher loss severities on defaulted loans than those backed by qualified mortgages (QM), according to a new report by Moody’s Investors Service. The key driver of the loss severities will be the higher legal costs and penalties for non-QM securitizations, says Moody’s in the report, “Non-QM US RMBS Face Higher Risk of Losses Than QM, but Impact on Transactions Will Vary.”

On 10 January 2014, the Consumer Financial Protection Bureau will begin to phase in new rules requiring that lenders make a reasonable determination of a borrower’s ability to repay a residential mortgage loan. The rules, which implement the Ability-to-Repay (ATR) sections of the Dodd-Frank Act, give lenders protections from liability if they originate loans classified as “qualified mortgages.”

“In non-QM transactions, a defaulted borrower can more easily sue a securitization trust on the grounds that the loan violated the ATR rule,” says Moody’s Senior Vice President Kruti Muni, a co-author of the report. “ Some QM loans will also be subject to a greater risk of penalty than others.”

The extent of the risks for RMBS will vary depending on the mortgage originators’ practices and documentation, the strength of the transactions’ representations and warranties, and whether the transactions include indemnifications that shield them from borrower lawsuits.

“The degree to which RMBS will need additional credit enhancement to account for the increased risk of losses from non-QM and rebuttable presumption QM loans will depend on the strength of originators’ compliance practices and the trust mechanisms protecting against lawsuits,” says Moody’s Muni.

Of the two types of QM loans, those with a “safe harbor” from ATR challenges and those with a “rebuttable presumption,” the safe harbor loans will be less likely to incur penalties.

“Borrowers of safe harbor loans will have grounds to sue only if they can successfully challenge the loan’s QM status,” says Moody’s Vice President Yehudah Forster, also a co-author of the report. “The specificity of most QM requirements, such as the prohibition of some affordability products as well as excessive points and fees, will make challenging the QM status difficult for borrowers.”

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We’re Slowly Getting There

The new issuance private-label US residential mortgage-backed securities (RMBS) market will slowly restart in 2014, and credit quality implications will vary given the different forces at play, according to a new report from Moody’s Investors Service, “2014 Outlook – US RMBS and Servicer Quality.”

New transactions in 2014 will be of lower credit quality because originators will have trouble maintaining volume in loan pools as refinancing activity decreases. This will lead originators to relax underwriting standards, resulting in further deterioration of the credit quality of the collateral backing the pools.

Furthermore, the shape of investor protections for new transactions is still in flux, with issuers continuing to explore different representation and warranty (R&W) frameworks. “Institutional investors and RMBS issuers have not yet reached a consensus on the appropriate balance of liability and protection,” says Kruti Muni, Moody’s Senior Vice President and Manager. “Investors will have to decide which R&W framework will provide a level of credit protection they deem acceptable.” Here’s the full scoop:

In addition, the creation of the qualified mortgage (QM) class will make it more expensive to originate non-qualified mortgage loans, because of the risk of borrower legal challenges, whose costs and penalties RMBS trusts would bear. “Because of the added risk, lenders will charge more to non-QM borrowers, and the loans will be more expensive to hold in a trust,” cautions Muni. Losses on pools with non-QM loans will increase as borrowers challenge foreclosures, causing trusts to incur legal fees, lengthen foreclosure timelines, and potentially pay penalties if the borrowers succeed.

Conversely, the collateral strength of outstanding RMBS will be stronger because the remaining borrowers in the pools will have stronger credit profiles, thus boosting the performance of those deals. “Improving loan-to-values indicate the credit strength of the remaining borrowers in the pools, and faster liquidation timelines weed out borrowers with weaker credit profiles,” notes Moody’s Associate Managing Director Debash Chatterjee. “Liquidating the backlog of severely aged properties in a portfolio will also lead to a decline in pool losses toward the end of 2014.”

The portfolios of non-bank servicers such as Ocwen, Nationstar and Green Tree continue to grow, fueled by large banks, which continue to shed their most seriously delinquent loans. Despite the added servicing capacity, completed foreclosure timelines will continue to rise because of the large number of complicated and unworkable foreclosure cases remaining in servicers’ backlogs. “However, timelines for new foreclosures will improve as judicial states clear their foreclosure pipelines,” says Chatterjee.

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The Dagong Show

*The Dagong Show*
**By Phil Hall**

new-PhilH***There is a good chance that you are unfamiliar with the Dagong Global Credit Rating Co. This Chinese credit rating agency is mostly unknown in the U.S., but it is already making significant inroads in other parts of the world, and there is no reason to believe that it will not have a major presence in the U.S. sometime in the near future. Personally, I am glad to see Dagong’s emergence because it offers the only serious challenge to three of the most conspicuous simians among the 800-pound gorillas that no one in the financial services orbit wants to acknowledge: the problematic U.S. ratings agencies.

****For the past five years, the role played by Standard and Poor’s (S&P), Moody’s Corp. and Fitch Ratings in the run-up to the 2008 economic crash has barely been acknowledged by the federal government and the mainstream media. Oh, yeah, Eric Holder’s Justice Department filed a suit against S&P earlier this year, but that is mostly seen as crass payback for the agency’s decision to downgrade the U.S. government’s credit rating in 2012 following the debt ceiling debacle – S&P’s pre-2008 actions were virtually identical to ratings offered by Fitch and Moody’s, but the latter two maintained Washington’s AAA rating in 2012 and were strangely spared the wrath of Holder. The credibility of the Holder campaign against S&P was further obliterated by his department’s decision to leak the news of the lawsuit to the Wall Street Journal before any legal documents were filed in court.

****For the most part, the three agencies have looked back at their disastrous ratings of toxic mortgage-backed securities, shrugged their shoulders, uttered an insincere “Oops!” and kept on trucking. Today, the relationship between this threesome and the U.S. financial services industry is a stale case of business-as-usual.

****Maybe it is time for the status quo to be shaken up. When the Chinese government began trumpeting Dagong as an alternative to the American credit rating trio in 2010, it called for more honesty and transparency in the credit rating process. No less a figure than Chinese President Hu Jintao announced the need for an “objective, fair and reasonable standard” that would “not be affected by ideology.”

****Of course, having Hu Jintao call for ideology-free fairness is equal to having Miley Cyrus advocate the importance of modest ladylike behavior – but even if the messenger was the wrong person, the message was still long overdue.

****In July 2010, Dagong first gave Washington an AA rating, which it downgraded to A+ with a negative watch four months later. That was eventually dropped to an A- and last month Dagong downgraded Washington’s credit rating further to an A, noting that the federal government was “still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future.” The U.S. credit agencies, in comparison, viewed the recent shutdown and debt ceiling crisis and left their ultra-high ratings of Washington unchanged.

****Needless to say, Dagong is not among the most favored entities in Obama’s Washington. The U.S. Securities and Exchange Commission will not provide it with Nationally Recognized Statistical Rating Organization designation, claiming that Dagong does not “comply with the recordkeeping, production, and examination requirements of the federal securities laws.”

****However, the view from across the Atlantic is somewhat different. In June, Dagong became the first Asian credit rating to receive approval from the European Securities and Markets Authorities, which gave the agency approval to provide services in the 27 European Union nations. Hmmm, what does Brussels know that Washington doesn’t?

****Dagong has also teamed up with Russia’s RusRating and an American entity called Egan-Jones to create the Universal Credit Rating Group (UCRG). How the UCRG will operate remains to be seen, but its arrival provides some much needed oxygen to the game.

****While Dagong is obviously not in a current position to overthrow the supremacy of S&P, Fitch and Moody’s, it has already chiseled out the first crack in their credit ratings supremacy. Ultimately, time will be Dagong’s ally – and in the none-too-distant future, the big three will have to scoot over and make room for a fourth player from across the Pacific. And if Dagong’s recent analysis of the Washington credit worthiness is any indication, it will offer some much needed honesty and frankness – which, on its own terms, is not something that often blows out of Beijing.