Since the financial crisis in 2007, residential mortgage-backed securities have been hit with high levels of borrower defaults, realized losses and credit rating downgrades.  Realized losses declared on private residential mortgage-backed securities (RMBS), already much higher than original rating agency and investor estimates, are projected to rise substantially in the coming months, according to a recent analysis by R&R Consulting, a credit rating and valuation firm in New York.

On the securities performing at December 2011, a universe of approximately $ 1.42 trillion, R&R estimate the amount of additional losses likely to materialize is $ 300 billion, with one-third concentrated in ten arranger names, including Countrywide, Morgan Stanley and JP Morgan. About 17,000 tranches, or 34% of the universe analyzed by R&R, may lose up to 83% of their remaining principal.

In addition, R&R estimates that approximately $ 175 billion of losses already incurred on the loans have not yet been allocated to the bonds in the related transactions. Failure to allocate realized loan losses could distort the valuation of related RMBS tranches.

“The light at the end of the tunnel is still a long way off for RMBS,” said Iuliia Palamar, head of ABS research for R&R.  “We are now drilling down into the analysis to identify the individual transactions by vintage, servicer and other important issues with respect to these losses.”

Unallocated Losses by Security Vintage

In the course of conducting valuations on RMBS, the R&R analytics team discovered widespread, serious, repeated data discrepancies. Ann Rutledge, a founding principal, asked the team to measure the magnitude of the discrepancy on the RMBS universe. To do this, R&R subtracted cumulative losses allocated to the tranches from unallocated, expected losses, calculated as the sum of defaults, bankruptcies, foreclosures and REOs minus recoveries. “The results were very disturbing: $ 175 billion of unallocated current losses and $ 300 billion of imminent losses,” Rutledge said.

Rutledge commented that she was not clear why these losses are being held in limbo instead of being properly allocated, since the data used by R&R in the calculations were included in the servicer reports. She cautioned, “Investors should be concerned about receiving inaccurate bond performance information and paying unnecessary fees.”

The implication for bond holders in RMBS is significant with respect to both estimates.  Subordinated securities in the RMBS with probable future losses ought to be written down by such losses but instead may be continuing to receive interest owed to more senior tranches. It could also mean that servicers are earning fees against loans that have already been liquidated, which also reduces the amount of cash to pay senior bond holders.  For example, in one month, servicers could generate $ 75 million or more in inappropriate fees against the $ 175 billion in unallocated losses.

Rutledge also noted that R&R has observed a steady increase in amount of limbo losses, raising the prospect that a significant amount of funds are still being misallocated for bond investors.

“The system for MBS is still fundamentally broken,” she said. “All the loose ends need to be identified and knit together into a well-functioning system before investors can feel comfortable investing in RMBS once more.”

R&R Consulting is a credit rating and valuation boutique. Founded in 2000, R&R has a patented process for obtaining current intrinsic valuations on structured securities in the secondary market.

Inquiries should contact Iuliia Palamar at +12128675693 or iuliia@creditspectrum.com

Protesters Demonstrating in Front of Foreclosure Fraud Settlement Meeting in Chicago

By: David Dayen, firedoglake.com

Protesters have gathered outside a meeting taking place in Chicago today between officials with the Obama Administration and some state Attorneys General or members of their staff, aimed at reaching agreement on a low-ball settlement with leading banks over foreclosure fraud.  The proposed settlement would give homeowners a pittance in exchange for a broad release of liability from prosecution for the banks.

About eighty members of various community and faith groups in Illinois, including national groups like MoveOn.org, National People’s Action and The New Bottom Line, have gathered outside the Chicago O’Hare Hilton Hotel. They are holding a press conference there and protesting the proposed settlement. Later in the day, the protesters plan to visit the local offices of Illinois AG Lisa Madigan, who is on the executive committee which negotiated the settlement, and the Obama for America 2012 campaign headquarters.

The protesters object to the low dollar value of the settlement, estimated at $ 20-$ 25 billion, when there is currently $ 700 billion worth of negative equity – money owed on mortgages less than the value of the home – in America. They also object to the fact that there has been no meaningful investigation into the depths of foreclosure fraud by the Department of Justice or any federal regulator. Further, they oppose a broad release of civil and/or criminal liability for the banks for their conduct at all levels of the housing market. [EDITOR'S NOTE: SOMEHOW THE $ 700 BILLION FIGURE HAS BEEN ACCEPTED. I did the math. The figure is ten times that at $ 7 trillion].

The proposed deal will get circulated to the banks today. Many of the holdout AG offices did not send a representative to the Chicago meeting. But they have the information on the settlement, and for a variety of reasons the events of the next 24 hours are seen as consequential. There are even rumors, according to Rep. Brad Miller (D-NC), of an announcement on the settlement appearing in tomorrow’s State of the Union Address. “They have not said anything to us on the State of the Union, but there’s a sense that they may do something,” added Sen. Sherrod Brown (D-OH), an opponent of the settlement on a conference call today.

Miller ticked off a number of unknowns surrounding the settlement. “What investigation has there actually been? What claims are being released?” Miller Asked. “Where did this $ 20 billion number come from for damages? What mortgages does this apply to? Does it apply to securitized mortgages that the banks don’t really own? Will they be able to pass on the losses for their own misconduct? Which homeowners get relief? If it’s just a dollar figure that the banks have to hit, will they pick the most expensive houses for relief and increase resentment against those who get the breaks in America?”

Brown, Miller and the coalition arguing for a “fair settlement” want a thorough investigation, with the inclusion of the Consumer Financial Protection Bureau (at this point not a part of this settlement). “It’s hard to know what a meaningful settlement would look like when we don’t have full disclosure,” Brown said. “Instead of a thorough investigation and criminal prosecutions, we’re talking about not much more than a slap on the wrist. The banks are not just too big to fail, they’re too big to jail.”

Justin Ruben of MoveOn.org, a key coalition partner, cited new polling showing that found that 70% of Americans believe the banks have not been investigated enough on their foreclosure practices, and that 60% of those polls would be less likely to support the President for re-election if he gave the banks a sweetheart deal. By contrast, the President would gain support if he announced a real investigation into Wall Street’s practices. MoveOn has forwarded a petition asking for an investigation, and has acquired over 360,000 signatures.