Posted on Monday, February 14, 2011
Barclays Capital says that as servicers perform complicated modifications and other actions, remittance reporting has been found wanting.
A recent study by the research firm examines typical remittance reports and points out flaws in the reporting process, aiming to make a case for overhauling the process of remittance reporting.
The report highlights several reasons that remittance reporting is flawed:
• Most remits commingle cash and non-cash items, making it difficult to reconcile the actual amount paid to the bonds
• Advance payments and recoupment, balance capitalization, fees paid, and modification adjustments are the most common sources of confusion
• The amount received at liquidation from the sale of individual properties is not reported. On liquidated loans, only the amount that enters the trust is provided, and there is no way to tell if severities were higher because of low recovery from the sale or because of unexpected or unreasonable fixed/variable/servicer related costs
• Non-timely reporting of modifications and mixed timeline reporting of liquidations and recoveries also result in inconsistencies
According to the study, “A remittance report –ideally – should be a simple translation of this flowchart that provides details on the various cash flows along with the beginning and ending balances.”
Instead the report gives limited information in areas that Barclays says is critical to understanding where money is coming from and going. Additionally, the way certain transactions are combined in the reports causes confusion because “the math gets fuzzy very quickly.”
In a section titled, “Problems with current remit reports,” the study says problems with modification cash flows and balance adjustments develop because the exact amount of forgiveness, forbearance, and principal recapitalization is not specified, but then the balances are applied to cash flows.
The report continues: the types of modification and terms of the adjustments are sometimes not even clear.
The company says servicer advancement and recoupment reporting needs improvement because advances paid and recouped are reported as a total amount, giving no indication of which loans the advances were made on. Some servicers advance differently on scheduled principal and interest and at times total advances exceed the scheduled payments on delinquent loans.
Mixed timelines also pose a problem in remittance reports, because a loss detail report might contain losses on loans liquidated in different months, leading to confusion.
The report ends with suggestions for improvement of the remittance reporting process, outlining both a short term and a long term solution.
In the short term, the study suggests servicers move to providing more details at the loan level, including advances made and/or recouped, modification details, and fees charged.
In the long term, the report says a completely revamped reporting structure needs to be developed that has a standardized approach for various cash flows.
By: Joy Leopold, DS News