DBRS Expects a Year of Reform for Mortgage Servicing

The ratings agency ""DBRS"":http://www.dbrs.com published its U.S. residential mortgage servicing review and 2012 outlook this week.

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The agency's analysts stress that mortgage servicers are going to continue to see ""much needed reform"" in 2012 as the industry moves to standardize the servicing business.

Kathleen Tillwitz, SVP of operational risk for DBRS, expects the first go at such standardization will center around implementing all of the items noted in the consent orders handed down by federal regulators to address robo-signing issues.

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Tillwitz adds that servicer reports will likely be aligned to increase transparency and match servicer compensation with the performance of the loans, i.e. lower servicing fees for performing loans and higher servicing fees for non-performing loans.

""The new minimum standards for servicing will likely result in the exit of some servicers from the mortgage business in 2012 as the expenses associated with achieving these standards will likely be too costly for servicers with weak balance sheets,"" according to Tillwitz.

According to DBRS' assessment, modifications that reduce rates and extend terms will continue to be the preferred loss mitigation strategy for many servicers. The agency notes, however, that there is expected to be an increase in principal forgiveness modifications once the multi-state attorney general settlement is finalized

Tillwitz says DBRS does expect the U.S. government to implement some of the REO programs outlined in the white paper released by the Federal Reserve earlier this month, such as the REO to rental program.

DBRS says, though, that because of the time it will take to implement such a program and get the subsidized financing approved, the industry will not see lower losses on REO properties until late 2012 or 2013.