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Severities surge in Countrywide’s New York loans

| January 10, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

New York loans liquidated out of legacy Countrywide deals have often shown losses far greater than the balance of the loan. Low property values and hefty servicer advances that need to get repaid often add up to outsized losses. But there may be more at play in a recent spate of liquidations.

Among legacy loans from New York that left private MBS trusts in December with greater than a 100% loss severity, a disproportionate amount of came from Countrywide trusts. Countrywide liquidations totaled slightly more than $22 million with an average loss severity of 188% while New York loans liquidated in the rest of the legacy universe totaled just $6.2 million with an average severity of 135% (Exhibit 1)

Exhibit 1: Stacking up legacy NY liquidations in December

Source: Amherst Insight Labs, Amherst Pierpont Securities

New York loans leaving Countrywide trusts through liquidation over the past six months show a similar pattern. Since July, more than$44 million in principal balance liquidated with an average loss severity of roughly 170% across the CWALT, CWHL and CWL shelves. High loss severities in Countrywide loans show up with some frequency, especially in judicial states like New York where liquidation timelines are longer. However a closer analysis of some of these loans raises questions as to why these loss severities are so elevated.

Case study: CWHL 2005-21

In December, loan ID 94556757 left CWHL 2005-21 through foreclosure generating a 302% loss severity. Based on proprietary property matching, the loan looks secured by 1639 East 4 Street, Brooklyn, New York. The loan had a principal balance of $367,081 when it left the trust. Estimated total advances of principal, interest, and taxes come in at just less than $400,000. Additionally, the estimated value of the property runs in excess of $1 million.

There should have been adequate proceeds to not only compensate the servicer for advances but to pay off the balance of the loan in the case of liquidation. According to the Bank of NY December remittance report, however, there were zero liquidation proceeds and a negative subsequent recovery of over $740,500 on the loan, generating the greater than 300% loss severity. An analysis of court records on the property shows that not only was the property not liquidated, but that it still appears to be in active litigation.

Court records in King’s County Supreme Court Index Number 507339/2018 for November 14 show that not only has the property not been liquidated but BNY Mellon as trustee had chosen to discontinue the foreclosure action at that time. Additionally, the court ordered that the plaintiff BNY Mellon “withdraws its prior demand for immediate payment in full of all sums secured, and reinstitutes the Loan as an Installment Loan.”

This leads to two questions: why was the loan disposed of from the trust in December if there was in fact no liquidation and additionally, given the order is to return the loan to a monthly principal and interest installment loan, who is entitled to any principal and interest paid since the loan is no longer an asset of the trust? If the loan was charged off due to an inability to foreclose this example may be representative of a potentially larger issue in judicial foreclosure states with a statute of limitations on foreclosure actions.

Potential exposure

 It’s difficult to say with certainty what the exposure may be for a couple of reasons. First, there is no absolute cap on what the loss severity on a given loan can be as it is a function of what the recovery, if any, on the property is plus any costs incurred in liquidation as well as advances that need to be reimbursed to the servicer. In the case where there is a charge-off or expungement of the lien, there is no potential recovery of principal and the trust incurs any additional losses associated with servicer reimbursement. Additionally, according to the terms of the Countrywide RMBS settlement, loans deemed ‘high risk’ are transferred to special servicing with each trust having a specific special servicer assigned to it. Different special servicers may be handling New York loans in foreclosure differently and potential charge-offs associated with the statute of limitations on foreclosures may not be uniform across all special servicers. Adding additional complexity, subsequent to the settlement, one of the six initially named servicers, RCS, is out of business, and information about where that special servicing was transferred is difficult to ascertain.

Exhibit 2: Certain Countrywide trusts have large concentrations of foreclosed loans in NY

Source: Amherst Insight Labs, Amherst Pierpont Securities

It seems reasonable that trusts with outsized exposure to foreclosure in New York may be subject to greater percentage risk of losses. Trusts with the largest concentrations of New York foreclosures tend to be relatively small, so, while it’s hard to cap potential exposure at the loan level, absolute losses likely appear to be limited. That being said most of the deals with outsized exposure were originally special serviced by RCS so it’s difficult to know where that special servicing resides and what the potential charge off risk associated with a statute of limitations on foreclosure may be. (Exhibit 2).  At a minimum, until these outsized severity prints begin to abate, mezzanine bonds with large concentrations of delinquent or defaulted loans in New York should price substantially wider to account for the risk.

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