Friday, June 20, 2008

Fitch Assessing Effect of Ocwen Interest Shortfalls on U.S. RMBS

(Fitch Ratings) Last month's interest shortfalls on certain Subprime transactions serviced by Ocwen Financial Corp. (Ocwen) are a subject that Fitch Ratings has been carefully tracking for the last several days. Fitch has been involved in ongoing discussions with senior management for Ocwen and Wells Fargo's trustee operations in order to determine the immediate cause and probability of continuation of the conditions which lead to the interest payment shortfalls.

In these deals, Ocwen reported interest payments to senior note holders that were in an amount less than would have been expected under the structure of the deals.

'In these discussions, it was determined that Ocwen had materially increased its modification program activity and many modifications involved principal reductions in addition to interest rate reduction and/or forgiveness of other payment and cost amounts,' said Managing Director Diane Pendley. April was the first month in which a sizable number of mods were reported through to the trustee for the May distribution. Ocwen indicated that it continued to report monthly activities on these transactions as in prior months.

In discussions with Wells Fargo the trustee indicated, due to the material increase in mods being performed throughout many RMBS transactions, the company had recently developed an enhanced reporting format, based on the trustee's participation on an industry task force on the issue. The trustee further indicated that it had circulated this new form to the servicers and when the servicer properly used this format, Wells Fargo would have sufficient information to determine the proper allocation of funds and/or losses. It is believed that Ocwen will be reporting in the new format for the upcoming cycle.

Unless otherwise specifically addressed in the controlling legal documents, Fitch believes that amounts considered as principal forgiveness would be treated as a mortgage principal loss and allocated to bonds according to the terms of the documents. In most instances, these losses are applied to the principal balance of the most junior bonds outstanding in the transaction.

Generally most RMBS transactions do not consider an interest shortfall as an event of default and a mechanism exists to have shortfalls potentially recovered from available funds over time. Shortfalls may be temporary, perhaps driven by a non-recurring circumstance and recovered quickly in subsequent months from excess interest, or essentially unrecoverable, likely resulting from poor portfolio performance.

'The likelihood and expected timing of recoveries will determine whether a bond's current rating will be affected by the occurrence of an interest shortfall,' said Managing Director Vincent Barberio.

Fitch continues to monitor the situation and will issue additional market commentary upon further developments.

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