The recent increase in mortgage delinquencies and foreclosures has brought significant attention to the costs of foreclosure to homeowners, communities, and mortgage industry participants. Although the impact of foreclosure on homeowners and communities is apparent, some confusion still exists about the impact on industry participants, particularly lenders, servicers, and investors. Foreclosure is a lengthy and extremely costly process and, generally, a losing financial proposition for lenders and investors. A recent Congressional Research Service paper, which analyzes current foreclosure issues, highlights how substantial and far-reaching these losses can be. While losses can vary widely, several independent studies find them to be generally quite significant: over $50,000 per foreclosed home2 or as much as 30 to 60 percent of the outstanding loan balance.3 This paper provides a summary of the impact to various mortgage industry participants, the foreclosure process, and the significant costs borne by participants. When a lender holds a loan in portfolio, it retains the credit risk on the loan and typically takes a direct loss if the loan goes to foreclosure. When a loan has been securitized, the investors in the mortgage securities hold the credit risk and take the loss if the loan goes to foreclosure sale. Mortgage securities generally are subdivided into groups known as tranches with distinct risk and return characteristics. As a result, losses usually are not borne evenly by all investors. Foreclosure losses, however, do impact the overall transaction and the available proceeds. As costs are recovered, senior tranche holders are paid first, then the junior i.e., higher risk, higher yielding tranche holders suffer the initial revenue losses. Investors in the senior tranches, however, can also suffer financial losses when foreclosures and related costs exceed expectations.
Document Download | Download |
Document Type | General |
Publish Date | 28/05/2008 |
Author | Working is in progress in ACASH |
Published By | Mortgage Bankers Association |
Edited By | Tabassum Rahmani |