10/15/2010

Investors Grumble Over Flawed Remittances

Mortgage-bond buyers are losing faith in the accuracy of remittance reports, and some say the apprehension could soon factor into their investment strategies.

Remittance reports, distributed monthly by securitization trustees, are supposed to provide routine snapshots of the cashflow-collection and distribution activities of servicers. However, investors say there has been a rash of recent instances in which the reported data differed considerably from what actually happened - making it impossible to determine values for their holdings.

Frustrated with what they consider insufficient efforts by servicers to address the discrepancies, certain buysiders are even grumbling that they'll direct their money elsewhere. Should they take such steps en masse, the conflict could undermine both recent gains in the secondary-market values of mortgage bonds and plans by issuers to bring new deals to market.

In fact, some are suggesting that flawed remittance reports already have emerged as an obstacle to the mortgage-bond sector. "It's a real mess. I wouldn't be surprised if some investors start moving into other sectors altogether. I know I've been thinking about it," one buyer said. "It's just become impossible to rely on these reports."

Servicers for private-label mortgage securitizations have always released remittance reports, typically on the 25th of each month. But the documents only began to receive widespread attention as the real estate market unraveled in 2007 and investors sought more details of their deals' underlying loans. Now, buysiders rely on the information to calculate their own cashflow expectations, much as holders of agency mortgage paper do with pass-through reports.

Many Wall Street Banks also have used remittance data to help set their trading strategies.

Why have the once-reliable reports been wrong? Investors point in part to increasing use this year of mortgage-modification programs that government agencies and lenders have implemented to aid troubled borrowers. They claim some servicers fail to verify when the changes take effect, resulting in mismatches between when a given loan's cashflows actually shift and when those adjustments are reported.

Servicers argue the volume of recent modifications has become overwhelming in comparison to their staffing levels. They also have faced ongoing struggles in figuring out how to treat loans that are in the trial phases of modification programs. "It has made it nearly impossible for us to appropriately account for changes," one servicing professional said.

Buysiders call that a red herring, saying servicers are equipped to account for modifications as they occur. "The servicers simply don't pay enough attention to what's happening to the underlying loans," one source said.

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