RMBS Losses May be Lower Under Cramdown than Foreclosure
CreditSights takes a look at the impact of proposed changes in how mortgages are treated in bankruptcy might affect residential mortgage backed securities.
In the current form the change includes the ability of the court to reduce, or ‘cramdown’, the value of the mortgage to the assessed worth of the house. If the law is enacted, these delinquent borrowers could conceivably shift from being default concerns to being cram-down concerns for RMBS investors.
Our estimates of negative equity and realised losses suggest that if all delinquent loans were to be crammed down rather than foreclosed and liquidated, the losses may be lower. But this assumes that all delinquent borrowers will default. And in any case losses would likely be substantial under either scenario.
The report, produced before today’s reported rise in foreclosures in February, indicates that record increases in delinquencies are turning into foreclosures at a rate that is lower than might be expected.
“…at the moment delinquencies are rising at roughly double their historic rate and foreclosures are falling. This suggests that delinquent mortgages are not being served with foreclosure notices.”
“The path from delinquency to foreclosure is, in theory, fairly uncomplicated: once the loan is more than three months late, the servicer will serve foreclosure. However, servicers have some discretion in the timing of foreclosure, not least because it is not difficult to argue that in the current climate the sheer number of delinquencies makes foreclosing on every late borrower impossible.”
The full analysis is available here.
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