Carrington Severities – Could this be the trick at getting them so low?
We thought this would be a great time to address a long-standing mystery in Non-Agency RMBS: Why are Carrington Loss Severities so low?
To back into the loss at liquidation, you need to know the sales price, sales expenses, escrow advances, corporate advances, P&I advances and miscellaneous liquidation expenses. Unfortunately, neither Carrington nor the trustee release data on sales price, outstanding advances or liquidation expenses. In many cases, it is obvious when there are no outstanding P&I advances, but it is not obvious as to how much other advances and expenses are outstanding. However, being data sleuths at heart, we discovered where some of this data lies within the public records data and we can now calculate the loss for ourselves and finally discover whether these low loss severities are real.
Data required
Sales Price: Easy once we locate the property. In many counties, a Special Warranty Deed is recorded that shows the sale by the trustee and lists the sale date and sale price.
Sales Expenses: Impossible to find and we assume a conservative 8% of Sales Price.
Escrow & Corporate Advances: In many counties in Florida, a Final Judgement of Foreclosure is recorded with the local Circuit Court which lists the sums due the trustee on the note and mortgage foreclosed (aka the smoking gun). This document will list a variety of charges including property taxes, insurance, property preservation expenses, legal expenses, and BPO Fees. Once we have this document, we then have actual advances from the last paid date to foreclosure date and we are only left to estimate remaining advances from foreclosure date to sale date. Without this document, we can only locate property taxes at the county assessor’s office or Zillow and the rest is an educated guess.
Miscellaneous Liquidation Expenses: With other servicers, we usually have some additional expenses charged to the trust to get to the loss passed through to the trust. This is impossible for us to estimate.
Findings
For the six case studies presented, our calculated loss severities are higher than what had been reported to the trust. Even using the most unrealistic assumptions (recovering only advances and expenses listed on the Final Judgement of Foreclosure), we still cannot reconcile to the low loss severities. Adding in conservative estimates for expenses and additional advances, our estimated severities are even higher. We believe that the documents filed with the court are correct and the advances and expenses listed are real. There is nothing to suggest otherwise.
Based on this analysis, we believe that Carrington may be reimbursing themselves for some advances and expenses at the pool level either at, prior or post liquidation. Obviously, Carrington is reimbursing themselves, but it appears not all happening at liquidation, as other servicers do. Although a six loan sample is far from statistically significant, it is still interesting what the analysis is suggesting. We are sure that there are Carrington liquidations that reconcile perfectly, but surely these six suggest that the low severities may not always be real or in other words, not calculated consistent with industry standards. See for yourself in the following six case studies.
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