Residential mortgage servicers are once again tapping the securitization market to fund advances to bondholders.
Servicing residential mortgages, particularly those issued before the financial crisis, is capital intensive. Nonbank servicers must borrow money to advance interest and principal payments on delinquent loans. Unlike banks, they cannot rely on cheap deposits for funding.
But issuance of term securities backed by repayment rights came to a halt in April of last year, when Standard & Poor's announced it was revising its criteria for evaluating the risks in deals.
This meant that servicers had to rely on private, unrated deals or shorter-term variable funding facilities.
S&P published its revised criteria in October, but the first rated deals have only come to market in the last few weeks.
There are some new features that issuers have to build into servicer advance trusts under the new rating criteria but "it’s been workable and issuers are finding ways to get deals done that work," said Tom Hiner, a partner at law firm Hunton & Williams who has advised on a number of such transactions.
New Residential Investment Corp. is currently in the market with a $1.5 billion deal dubbed NRZ Advance Receivables Trust 2015-ON1. The real estate investment trust recently acquired the assets of Home Loan Servicing Solutions from Ocwen Financial; this deal refinances two existing securitizations, HLSS Servicer Advance Receivables Trust and HLSS Servicer Advance Receivables Trust.
The advance facility is backed by reimbursement rights to private-label mortgage-backed securities.
In June, Ocwen completed $450 million servicer advance refinancing of its Freddie Mac financing facility (formerly OFSART). The transaction securitizes the reimbursement rights to funds advanced on mortgages insured by the government-sponsored enterprise. S&P's ratings on the notes issued by the deal, Ocwen Freddie Advance Funding LLC's series 2015-T1, 2015-T2 and 2015-VF1, ranged from AAA to BBB and pay a weighted average interest rate of 2.225%.
In a July conference call discussing second-quarter earnings, Ocwen executives said the deal was positively received; it was upsized by $50 million and the advance rate on the notes was 8 percentage points higher than the facility it refinanced.
Hiner expects much of the market activity in the next two quarters to come from refinancing portions of the often unrated variable funding note commitments extended by bank lenders during the S&P moratorium on rating deals with term ABS.
This trend could result in a total of 10 to 12 term ABS deals by the end of the third quarter, according to Hiner.
The new deals have new features to address S&P's recalibrated rating methodology, which takes into account the potential for extended timelines for reimbursements, the liquidity risk of the notes under stressed conditions, and the servicer's ability to continue advancing based on its credit quality.
Timelines are further adjusted based on the actual recent experience of the servicer in recouping advances. The criteria establish "standard" reimbursement curves along with "above standard" and "below standard" ones for different advance types and rating scenarios.
The new methodology also includes a more stringent liquidity reserve fund requirements; this requirement varies according to the geographic diversification of receivables in the master trust.
"In a high-stress scenario, you could have potential issues where you didn’t receive cash from the receivables because you may not be liquidating properties as quickly," said Jeremy Schneider, the agency's director of RMBS ratings.
Hiner also expects to see more additional deals backed by repayments rights to advances on agency mortgages, similar to Ocwen's. While servicing mortgages guaranteed by Fannie and Freddie is not as capital intensive as servicing nonagency mortgage securitizations, Hiner thinks that more participants with agency servicing portfolios will look to the ABS market for funding.
S&P's older criteria for rating servicer advance receivables securitizations was not tailored for agency RMBS, simply because it had not seen many deals backed by IOUs from Fannie and Freddie. "But now there is more of an appetite," said Waqas Shaikh, S&P's managing director for RMBS ratings. The new criteria takes this into account.
Nationstar is the only other issuer to previously place agency notes under its Nationstar Agency Advance Funding Trust in January 2013.
There might not be any more deals from New Residential, however. The REIT said during its second-quarter earnings call that it has $3.5 billion of additional financing to fund increased balances of servicer advance receivables and upcoming maturities. The company acquired $5.1 billion of reimbursement rights through its purchase of HLSS; its portfolio now totals $8.5 billion.
And Ocwen, which has so far sold $66 billion of agency MSRs, is in the process of selling another $25 billion, according to its second-quarter earnings report. However, the issuer intends to remain in the agency space. On the company's April 30 conference call to discuss operating results for the first quarter, CEO Ron Faris said Ocwen did not intend to sell any of its Ginnie Mae MSRs and would not completely exit GSEs or servicing or lending. The issuer still has $34 billion in GSE servicing rights and approximately $8 billion of GSE subservicing, and plans to continue to originate and service new Fannie Mae, Freddie Mac and FHA loans.
However, Ocwen executives said that they remain "optimistic" that the company will eventually be able to resume purchasing mortgage servicing rights based on discussions with the New York Department of Financial Services and the California Department of Business Oversight. The servicer's ability to acquire new MSRs is currently restricted as part of last year's settlements with the two regulators over its practices.
Once purchases resume, Ocwen plans to partner with New Residential to either help finance the purchases or finance any funds that must be advanced to mortgage bondholders as part of the servicing. This is similar to the arrangement that Ocwen had with its Home Loan Servicing Solutions affiliate before it sold that business to New Residential.
HLSS often turned to the securitization market to finance these advances.
"They [New Residential] would be definitely one of the first financiers that we would go to," said Michael Bourque, Ocwen's chief financial officer.
Typically servicer advance master trusts are structured with two components: variable funding notes and term asset-backed securities. A VFN is essentially a revolving line of credit that is typically placed with one or a handful of banks or other institutional investors. It can be drawn and paid down, sometimes within the same month, to fund the servicer's advance activity. This component of servicer advance securitization trusts continued to be issued in the private market without ratings while S&P reviewed its ratings criteria, since it is privately negotiated between lender and borrower.
For example, on June 15, PHH Corp. said it issued $155 million of VFNs under its PSART servicer advance securitization trust, in a transaction with Wells Fargo Bank. A portion of the proceeds from the transaction was used to repay in full all outstanding VFN previously issued by PSART to the Royal Bank of Scotland in March 2014.
By comparison, term ABS is typically placed with investors via an offering process, and is typically rated. Hiner believes that issuers that increased their reliance on VFN while S&P reviewed its ratings criteria will now look to refinance some of these notes as term asset-backed securities.
"Over the last year we've seen advance funding coming primarily from revolving bank financing," said Hiner. "With the market for term ABS back, the efficiencies of the master trust structure produced by its pairing of revolving VFNs with term ABS is becoming available again."
