Nonbank mortgage servicers are increasingly using securitization to access the capital needed to fund purchases of servicing assets, increasing both the size and complexity of servicer advance transactions, Standard & Poor’s said in its latest report.
Servicers are trying to entice a more diverse investor base by structuring transactions with unconventional features and nontraditional collateral types, which could introduce risks as well as limit credit rating agency’s ability to reply on historical performance.
"When we assign ratings we assess what we see as any additional risks, as well as our view of the potential impact of the structural and collateral changes. We typically do this through additional scenario analysis, incorporating additional information, and parsing the information we typically receive in order to quantify the risk," said Greg Koniowka and Rasool Alizabeth, credit analysts for Standard & Poor’s.
The securitization market’s recent changes are primarily due to the participation of private equity through investments in mortgage servicing companies, which place greater emphasis on total returns, the use of leverage and new regulations.
All of these changes have spurred the consolidation of nonbank servicers and prompted bank servicers to shed servicing assets, S&P noted.
"In our view, mid-sized servicers are exiting the servicing business due to the continuing costs and requirements from the Consumer Financial Protection Bureau’s increased regulations, which may affect their profitability," the analysts explained.
Meanwhile, now that private equity investors are participating in the loan servicing space and servicers are completing stock offerings, servicers are seeking more efficient ways to finance their assets — presumably to maximize returns or dividends to the equity investors.
Traditional collateral types backing servicer advance transitions include corporate advances as well as taxes and insurance escrow. However, recently, other nontraditional collateral types are becoming apart of the evolving market.
For instance, servicers are using agency advances.
"As banks continue to sell their agency MSRs and the associated outstanding servicing advance receivables to nonbank servicers, we anticipate more interest in securitizations of agency advance receivables," analysts said.
They added, "Our analysis of this collateral type is similar to that of nonagency advances and we evaluate the credit quality of the underlying collateral using our servicer advance criteria instead of relying on the agency's credit ratings under our counter-party criteria."
Generally, while issuers are expect to continue to take advantage of the favorable market conditions for term financing, longer-term note issuance will only be a small portion of the total issuance from any one trust and the bulk of the notes will have one-to three-year maturity timelines.
"As the servicer advance market evolves, we will continue to evaluate the potential effects that changes in servicers’ behavior or market conditions could have on the stability of new credit ratings that we assign, as well as on our analyses of servicer advanced transactions," Standard & Poor’s concluded.