Scratch & Dent Market Growing.(mortgage loans)

An investor base for "scratch and dent" mortgage loans is growing, which may be good news for servicers and investors in re-performing and subperforming mortgage loans.

But it also has required rating agencies to develop new methodologies for evaluating the default frequency and severity on these unusual loan types, focusing closely on the borrower's repayment patterns and the loan servicer's ability to manage these loans, according to Moody's Investors Service.

Typically, scratch-and-dent loans fall outside the guidelines an issuer of MBS has established for inclusion in its loan pools for jumbo A, alternative-A or subprime securities program. The four major reasons for noncompliance, according to Moody's, are misassigned credit grades, poor appraisal quality, consumer law compliance issues and missing loan documentation.

"We expect steady continued issuance as issuers continue to access the capital markets, with competition being expected to increase as the new market entrants compete with established market players," said Moody's analyst Christine Lachnicht, author of a Moody's report on scratch-and-dent securitizations.

Moody's said the scratch-and-dent loans are typically ...