The transfer of mortgage servicing from a bank to a large non-bank can result in greater cash-flow volatility because of more conservative stop advancing policies, according to Fitch Ratings.

Case in point, RMBS collateralized by mortgages transferred from Bank of America to Nationstar Mortgage have incurred bondholder payment disruptions as a result of missed payment advancing rates.

The delay, Fitch stated in a report published today, albeit temporary, is enough of a disruption to cashflows that it could trigger downgrades on the RMBS, “particularly when underperforming loans exist within the pools”.

“The new servicer may determine that a portion of the prior advanced amount is non-recoverable and recoup it from the total monthly amounts available for distribution,” the report stated. “Interest shortfalls can occur on the RMBS when a servicer recoups or 'clawbacks' prior advanced amounts”.  

Although bank and non-bank servicers follow the same advancing guidelines, non-bank servicers “generally make the determination to stop advancing earlier than bank servicers,” said Fitch.  “On average, non-banks advance missed payments on only 40% of delinquent loans in the subprime sector while banks advance closer to 50%”.

Nationstar and other nonbank servicers have been on an acquisition spree, and they have been tapping the securitization market to fund this growth. The number of loans Nationstar serviced jumped 123% last year to $283.3 billion.


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