ASF 2013: The mortgage bond investor checklist
There is a bit of anticipation coming into this year’s American Securitization Forum conference in Las Vegas, because the rules around mortgages are finally beginning to become clearer. As such there seems to be some optimism that the private-label market, in some form, may start producing some volume.
The session I attended on Sunday focused on how mortgage servicing impacts a deals performance, which is a relevant concern to both legacy portfolios and any new issues. Understanding the role mortgage servicing will play in any, future private RMBS issuance is now a key target for investors.
And, as the first day of ASF indicates, technology now provides enough power to help fuel this progress.
Allow me to sum the discussion of such that took place during the panel Methods of RMBS and CMBS Deal Performance Analysis, led by Evan Firestone from CoreLogic and Dan Gottlieb from Trepp.
Here is today's mortgage bond investor checklist:
Cash Flow Analysis? Check.
Option-adjusted spread analysis? Check.
So if I do these things, I'm covered when it comes to evaluating RMBS performance, right?
Well… there's that whole mortgage servicing thing which creates an undercurrent of uncertainly when predicting and estimating bond cash flows, which becomes even trickier the farther down the tranche seniority the investor sits.
Here are a few ways in which mortgage servicing affects the underlying value of an RMBS:
1. Principal, Interest, and Advance Payments. Each servicer performs differently simply because of business practices. Their individual approach and risk tolerance to advancing cash flows for delinquent loans varies from servicer to servicer.
2. MSRs. Billion dollar MSR pools are moving around regularly since the second half of 2012. Each time these MSRs trade, the advances and cash flow payments through to these RMBS changes, and when the MSRs trade, remember that market only sees the primary servicer on the note. What about the sub servicer that also changes behind the primary servicer? Their care for loans also differs from firm to firm, all rolling into RMBS cash flow performance.
When the servicer changes, so does the underlying bond cash flows because of servicer practices. Not only does this change when the servicer changes, but also when there is the hidden subservicer below the surface that might change, which also affects cash flow performance.
3. Government Refinance Programs. With close to 2 million loans refinanced through HARP 1 and 2 — HARP 3 could add another million refinanced mortgages to the tally according to some estimates.
4. The CFPB. Remember those new rules just announced for servicing delinquent loans? These mortgage servicing rules will affect which servicers are able to meet these new requirements, and ultimately affect the cash flows to the RMBS.
While oversight on servicing practices are introduced, such as the Servicer Alignment Initiative and the recent CFPB rules, each servicer practices differently.
Mitigating mortgage servicer risk remains a primary target for the GSEs. Ginnie Mae cares deeply about issuer and mortgage servicer risk because they are responsible for backing these securities. While Fannie Mae and Freddie Mac have the added focus of about borrower credit risk and interest rate risk, servicer risk remains a primary risk driver as well.
RMBS valuation comes down to cash flows, collections, and payments. While investors narrow the assumptions placed on this critical point in the cash flow supply chain, bond valuations will become much more predictable.
Scott Sambucci works with CoreLogic Advisroy Services, the opinions expressed here are his own.