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Securitizing mortgage advances market set to boom

Challenges and rewards abound but due diligence critical

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The market for administering, financing and securitizing advances will grow from $4.5 billion in 2013 to as much as $25 billion in 2014, according to the morning panel on the topic at the Information Management Network’s first-ever Residential Mortgage Servicing Rights conference.

“In general in the servicer market there is $25 billion servicer advance paper out there,” said one of the panelists.

(Note: IMN asks for the conference to be off the record. With no exceptions, panelists are quoted but not named.)

How aggressive will nonbank servicers be in buying new paper this year is a good question, panelists said, but most agreed there will probably be good growth this year, even as nonbank servicers are learning what advance paper issues are.

What are some of the challenges and how to deal with them?

“A lot are trying to do smaller deals to get investors used to the asset type,” a panelist said. “The number of issuers have laddered liabilities – one-year, three-year, and sometimes five-year liabilities.”

So what collateral is available, the moderator asked.

“You have your P&I advances, delinquency advances and servicing advances like corporate and escrow advances to bolster individual properties and loans in securitized pool,” a panelist said. “As the structure of servicers is changing – additional advances are coming in – subservicing advances, and increase in servicers trying to service those advances.”

Investors generally have taken to the sector and like the spreads, the panelists agreed. But what kinds of due diligence needs to be done?

“The type of diligence that you do – banks do a lot of warehousing of these assets. You need to know what’s their strategy? What’s the team? How deep is the team? What’s their history as a servicer? What complaints do they have?” a panelist said. “Sometimes you hire third parties to do more forensic reviews. It’s a fairly involved and detailed process to go through – whether you’re a lender, on a warehouse basis or as an investor. That team and servicer is a little more important than you might think.

“Much of the issuance is done by recent buyers of servicing rights – there’s a fairly involved transfer process, it’s two step – buying and transferring. There’s a fair amount of approval done in the process,” he said.

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