Transfers of mortgage servicing to non-banks will continue to disrupt cash flows to RMBS investors in 2014, according to Moody’s Investors Service.
Although the total number of transfers will slow, the strategies these smaller companies employ with delinquent borrowers is more likely to affect the cash flows in residential mortgage backed securities than the policies of bank servicers.
Cash flow disruptions can result if a new servicer follows different advancing, loan modification, reporting or loss mitigation timeline practices than the previous servicer. In addition, a new servicer may have a different policy for advancing payments that borrowers miss to bondholders. Moody’s noted that many of the recent buyers of mortgage servicing rights lack the access to cheap funding that many banks enjoy. It said these servicers tend to advance on a lower percentage of delinquent loans than do large bank servicers. So as the banks sell their servicing portfolios to smaller specialty servicers, recoupment of outstanding advances is likely to continue.
Servicers’ use of an aggressive short sale or liquidation strategy will have a different impact on bond cash flows than an aggressive modification strategy. Although both strategies will ultimately reduce overall losses to the trust, the modification strategy will result in a steady, but slow cash flow, while a liquidation strategy will result in an initial large cash flow that will taper off quickly. Whether these strategies are credit positive or negative for the bonds will depend on the payment priorities within their waterfalls.