Originally posted by: GTKeeper
Sure here it is:
Quote:
A "Deficient Valuation" is a bankruptcy proceeding whereby the
bankruptcy court may establish the value of the mortgaged property at an
amount less than the then outstanding principal balance of the Mortgage Loan
secured by the mortgaged property or may reduce the outstanding principal
balance of a Mortgage Loan. In the case of a reduction in that value of the
related mortgaged property, the amount of the secured debt could be reduced to
that value, and the holder of the Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of the Mortgage Loan
exceeds the value so assigned to the mortgaged property by the bankruptcy
court. In addition, other modifications of the terms of a Mortgage Loan can
result from a bankruptcy proceeding, including the reduction (a "Debt Service
Reduction") of the amount of the monthly payment on the related Mortgage Loan.
However, none of these shall be considered a Debt Service Reduction or
Deficient Valuation so long as the Servicer is pursuing any other remedies
that may be available with respect to the related Mortgage Loan and either the
Mortgage Loan has not incurred payment default or scheduled monthly payments
of principal and interest are being advanced by the Servicer without giving
effect to any Debt Service Reduction or Deficient Valuation.
All this is saying is that any mortgage principal balance above the valuation amount will become unsecured. Other modifications can occur, per the bankruptcy court, but if the servicer is pursuing other remedies, then the BK court won't enact their own judgments.
And another Quote:
In general, a "Realized Loss" means, for a Liquidated Mortgage Loan, the
amount by which the remaining unpaid principal balance of the Mortgage Loan
exceeds the amount of liquidation proceeds applied to the principal balance of
the related Mortgage Loan. "Excess Losses" are Special Hazard Losses in excess
of the Special Hazard Loss Coverage Amount, Bankruptcy Losses in excess of the
Bankruptcy Loss Coverage Amount and Fraud Losses in excess of the Fraud Loss
Coverage Amount. "Bankruptcy Losses" are losses that are incurred as a result
of Debt Service Reductions and Deficient Valuations. "Special Hazard Losses"
are Realized Losses in respect of Special Hazard Mortgage Loans. "Fraud
Losses" are losses sustained on a Liquidated Mortgage Loan by reason of a
default arising from fraud, dishonesty or misrepresentation.
Again, without looking into too much detail, it looks like by "coverage amount", they are referring to loss reserves, any amounts lost over the loss reserves will hit the principal balance of the bonds.
Not all tranches are effected equally. First, subordinate tranches will get hit first, the lowest tranche, the loss reserves, will get hit first. Then, as losses mount, the next highest tranches will get hit. ALL bonds within a tranche are hit pro-rata. The last tranche, usually AAA will only get hit when all tranches below it suffer 100% losses.
For example, if the loss reserves are 3% of principal balance of the loans in a securitization, and losses are 3%, then the loss reserves are wiped out. If the BBB tranche is 2% of the loan pool and 4% losses are realized, then 50% of all BBB bonds are written down. If there is a total of 8% collateral underneath the AAA bonds and there are 8% losses, then all bonds underneath are written down 100%. At 8.1% loss, then .1% of the collateral is written down and that loss is applied to all AAA bonds pro-rata.
Keep in mind that if the home goes into foreclosure, then the home is only worth what the market value dictates. If there was a $100,000 mortgage that the securitization trust holds and the house is worth $50,000, then the securitization trust will realize a 100,000 default with a 50% loss severity. In addition, since the home is now REO (real estate owned), the trust is now responsible for maintenance, taxes, HOA, refurbishment, and any sales commissions. The net realized value of the recovery, net of judicial foreclosure procedural costs, are deducted from the recovered value.
Thus, let's say that the home won't be sold for a year and more than $10K of maintenance, sales comms, taxes, and other costs are incurred, then the trust actually realizes a 60% loss severity.
Now, let's say we keep the obligor in the house. We write-down the mortgage to 50K and then let the other 50K go unsecured. If the homeowner pays, on time, for the next 5 years, the 50K unsecured is totally written down and goes away.
What has happened?
First off, the 10k of taxes and other costs, do not occur in the securitization trusts eyes. Second, the securitization trust then realizes 6% interest from the mortgage payment. If costs of the trust were 5%, including all servicing fees, then the trust realizes 1% per annum of "excess spread". This means that 1% of principal, per year, is re-realized by the bond holders. If this continues for 10 years, then using simple math (not interest calcs of an amortizing loan), 10% of additional principal will have been recovered.
You see, if the securitization trust just allows a judicial foreclosure, they recover only 40k. If they write down everything, they recover 55K+. Which scenario is "better"?
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