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Investments

S&P: Prime jumbo RMBS advance rates nose-dive

Subprime rates stabilize

falling stock

The advance rate for prime jumbo residential mortgage-backed securitizations fell sharply in the last few months, according to a new report from Standard & Poor’s Rating Services.

In S&P’s RatingsDirect report, analysts Nick Gurevich, Jack Kahan, and Jun Wang write that the decline is mainly the result of ongoing transfers of legacy loan servicing rights to nonbank servicers.

“Bank servicers, such as Wells Fargo (WFC) and JPMorgan Chase (JPM), have maintained a high (more than 90%) level of advancing on prime jumbo collateral,” the analysts write. “However, nonbank servicers, such as Nationstar (NSM) and Ocwen (OCN) ,have advance rates that are substantially lower and have been steadily declining over the past six months.”

S&P’s analysts posit that the lower advance rates may be due to nonbank servicers having substantially lower liquidity and availability of funding, in addition to looser regulations than their bank counterparts.

“These changes have had a very strong impact on the overall prime jumbo advance rates, and we expect they will have material value implications for the bondholders across the capital structure,” the analysts write. “Historically, prime jumbo advance rates were more than 90%, and now they are approaching 80%, an all-time low.”

Conversely, the advance rates in the subprime RMBS market have stabilized, according to S&P’s report. “In this sector, advance rates for several delinquency buckets have increased, and the composition of the delinquency pipeline has improved,” the analysts write.

“With better market conditions, rising home prices, and lower loss severities, we expect advance rates in the subprime sector to remain stable or improve.”

According to S&P’s report, there has been improvement in advance rates for subprime sector since the middle of 2012, stemming mostly from higher advance rates for the 30+, 60+, and 90+ day buckets. The advance rates for the REO and foreclosure buckets were mostly moving lower as well.

“Subprime advance rates have been stable when compared to advance rates for prime loans,” S&P’s report states. “Since mid-2012, subprime advance rates have plateaued at 45%-55%. When we apply a one-year lag to advance rates, there is a strong statistical correlation between home price index and subprime advance rates; stabilization in the housing market should have positive effect on the subprime advance rates.”

Overall, S&P’s analysts expect prime advance rates to continue the decline as nonbank servicers onboard more and more loans, servicing higher and higher percentage of the prime collateral. “On the other hand, we expect subprime advance rates to stabilize or increase, as market conditions improve and composition of the delinquency pipeline shifts toward higher-advancing delinquency buckets,” the analysts write.

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