Early in the course of the pandemic, market watchers were concerned that servicers may not have
“There was a need for servicer advance financings, a lot of it, back in April; but then things didn’t pan out that way,” said Sujoy Saha, director and lead analyst on Standard & Poor’s residential mortgage-backed securities team.
The availability of financing hasn’t been an issue to date, but it still could be, Rudene Haynes, a partner who specializes in structured finance and securitization at the law firm Hunton Andrews Kurth, told attendees at a virtual event earlier this month.
“While the pandemic has been horrible and mortifying in so many ways it really has not hit the level in terms of having a real adverse impact on the servicers not being able to find financing,” she said at Information Management Network’s ABS East conference, adding the caveat, “Knock on wood.”
With infection rates rising, there’s still a risk the equilibrium between the supply of and demand for servicer advance financing could be upset by a spike in delinquency or forbearance — at least until widespread vaccinations can be achieved.
“Certainly if we see a huge swing in delinquencies and there’s a great uptick in the need for advances, I do think we may see a need for a federal facility that would help I think to maintain confidence in the market,” said Susannah Schmid, a partner in the Chicago office of Mayer Brown’s banking and finance practice.
However, market performance subsequent to the initial shock from the pandemic has been relatively strong to date.
“Forbearance levels didn’t get as high as people in the market thought they might have gotten,” said Jeremy Schneider, a senior director on Standard & Poor’s residential mortgage-backed securities team. Some are as low as 3%. The highest, in the small securitized non-QM market, are in the high teens.
The fact most forbearance rates are lower has helped ensure the sufficiency of financing designed to cover servicers’ responsibility to advance payments to investors when borrowers fail to make payments. However, several other factors have kept supply and demand in balance, too.
These include government rate intervention, several temporary public contingencies, a strong performance track record for financing facilities, and booming refinances that served as a source of cash for many mortgage companies.
Early on, worries abounded over whether Wall Street firms would balk at providing servicer advance financing because of the lack of recent experience with a distressed environment. In the end, financiers were comfortable offering it because they knew the arrangements had performed well in tough times like the Great Recession.
Hunton Andrews Kurth’s coverage of transactions over the last couple of decades anecdotally suggests not a single loss on servicer advance financing transactions has occurred, according to Haynes.
In addition, companies have been comfortable with financing because it’s structured so investors receive payments ahead of all other creditors, she said. Providers are typically investment banks such as Credit Suisse or Barclays.
On the demand side, there’s limited visibility when it comes to use by smaller private companies. However, it’s clear from rating agency reports on securitized deals — such as a New Residential transaction set to close Wednesday — that most, if not all, of the large nonbank servicers use it. In addition to New Residential, companies with advance financing facilities include Ocwen, Mr. Cooper, PennyMac and Select Portfolio Servicing.
Typically, nonagency transactions structured with a variable-rate funding note are the securitization vehicles used for this purpose. Term notes are issued over time to reduce the variable funding note, said Schneider.
At least two new transactions have been entered into since the pandemic: Ginnie Mae advance financings entered into by
“We haven’t seen a large increase [in servicing advance financing] from COVID in and of itself,” said Schneider.
While that suggests there’s no shortage of this financing available today, neither the market nor federal officials are likely to completely dismiss the risk it wouldn’t be available if needed.
The U.S. mortgage market is largely funded through government-related securitizations, and that market could be undermined if servicers were unable to keep covering borrowers missing payments and ensuring that securities investors could still get their cash.
The Biden administration could choose to address the risk of possible disruption with a public backstop for advance financing as the industry has suggested. However, it’s first move is more likely to be one that is designed to head off a rise in forbearance with consumer relief.
“This incoming government may be a little bit more receptive to federal aid policies targeted more toward homeowners, which then would help alleviate the need for intervention at the servicing level,” said Schmid.
