Scratch and Dent Mortgage Loans

Abstract

Scratch and dent mortgage loans are those that fall outside of the customary ?A,? ?Alt. A,? or subprime originator guidelines and performance expectations. While the majority of scratch and dent loans are performing, they may also be either re-performing, non-performing, or sub-performing. This article considers three areas an investor should understand while participating in a securitization involving scratch and dent mortgage loans: acquisition, servicing, and structure. Purchasing scratch and dent mortgage loans is more of an art than a science as the true value is in the ability of the servicer to assess the loan pool appropriately. Also important is the servicer's ability to collect on mortgage loans, prevent defaults from occurring, or work out loans through modification and forbearance agreements and efficiently manage the liquidation process. Scratch and dent securitization structures are dictated primarily by the collateral pool make-up and whether it includes non-performing loans.