The decline servicer advancing rates suffered over the last several years is leveling off and servicers could see a positive change in trajectory – at least by modest degrees – as home price gains of 20% since 2012 upped recovery values for servicers, Fitch Ratings says.
For more than seven years the share of delinquent mortgage payments advanced by servicers of non-agency RMBS transactions fell from 95% at the peak to a low of 54% by September 2013. The sharp reduction in advancing rates coincided with national home price declines and reduced liquidation proceeds.
Advancing rates have recently stabilized and look to be improving.
“Last month’s servicer advancing rate stood at 56% after slowly increasing for four of the last five months,” reports Fitch analyst Ryan O’Loughlin.
Fitch expects this improvement to continue as liquidation recoveries continue to increase, given gains in home prices. Prices have been gaining year-on-year for almost two years.
Servicer in most RMBS transactions are required to advance delinquent interest and principal payments, at least to the point of being recoverable at liquidation.
This provides liquidity to the trust, so that interest or principal shortfalls are avoided. Most servicers determine whether to advance or not based on a comparison of a conservative estimate of liquidation proceeds and the mortgage balance plus any advances to date.
“Advancing rates tend to differ between bank and non-bank servicers, with nonbanks generally advancing less than banks,” O’Loughlin reports. “Banks have remained fairly flat at a rate of 64% since the start of 2013. Nonbank servicers have increased the amount they advance by about 2% to 48% since second quarter-2013.”
Banks tend to hold higher quality prime loans while the nonbanks generally service higher percentages of Alt-A and subprime loans. Nonbanks such as Nationstar (NSM), Ocwen Financial (OCN) and Walter Investments (WAC) now service 72% of non-agency deals, and have changed the RMBS and MSR landscape.
“Banks typically operate with a lower cost structure and do not view servicing as a standalone business. Additionally, non-bank servicers track their ability to recover advancing more aggressively and stop advancing sooner. Nonbanks need to operate more strategically as servicing is their primary business model,” O’Loughlin said.
Fitch says that the improvements lately in advancing have not been uniform across sectors. Since hitting a bottom in September, subprime loans have seen their advance rate increase from 42% to over 46%.
Prime loans meanwhile have actually seen a marginal decrease over the past few months to 87% while Alt A has remained relatively flat at 71%.
“Part of the gain in subprime advances is likely due to overly pessimistic views on recovery values that is starting to be corrected. The marginal decline in prime is the result of non-banks servicing a slightly larger percentage of outstanding prime loans,” he reports.
Fitch expects servicer advancing rates to improve further in 2014 as recent home price increases continue to improve liquidation recoveries for servicers.