The scrutiny placed on servicers after the disclosure of foreclosure deficiencies will continue into next year and ultimately cause foreclosure timelines to extend by three months or more, Moody's Investors Service says in its 2011 U.S. Mortgage Servicer Quality Outlook report. Although the scope of documentation irregularities should become better defined over the next few months, the scrutiny may lead to fresh controversies about additional servicing practices, the rating agency says.
Moody's expects that more clarity will come as servicers complete their extensive loan-level reviews of defaulted portfolios and internal procedures later in the year. The legal consequences of the irregularities will also emerge as courts respond to them.
‘In 2011, it will become evident how seriously courts will view violations of court rules on foreclosure procedures’ says Gene Berman, a Moody's assistant vice president and analyst and lead author of the report. ‘Since judicial foreclosure laws vary as greatly from state to state as judicial foreclosures do from judge to judge, we could see a wide range of judicial opinions on the legality of the foreclosure processes and actions taken to remedy each situation.’
Since irregularities such as robo-signed affidavits became known, Moody's has placed the servicer ratings of 12 shops, including the five largest U.S. residential mortgage servicers, on review for downgrade.
The collective scrutiny may lead to new controversies, says Moody's. One area that may be questioned is the different practices servicers have in the way they make advances to investors. The method can alter cashflows to the advantage of some classes of investors over others.
Another area of exposure may be the denial or curtailment of mortgage insurance and trust claims that result from servicing errors and how these may create losses for investors.
Moody's also anticipates that the government will enhance its mortgage modification programs, likely in ways to address the problem of borrowers with negative home equity. The government is likely to seek a broader use of principal forgiveness.