Fitch Releases Criteria on Servicer Risk Factors
With mortgage delinquencies increasingrnexponentially at the same time credit was drying out, servicers have had a bitrnof a double whammy making contractually obligated advances on the loans theyrnare servicing. One financing method thatrnhas been used in recent years is Servicer Advance Receivables Trusts (SARTs). Now Fitch Ratings has released criteria byrnwhich is will be rating these SARTs.
As background, when servicers havernloans in their portfolios which are collateral for residential mortgage backedrnsecurities (RSMB), those servicers must remit payments to the investors eachrnmonth even when mortgage payments have not been made. The servicer must make these payments ofrnprincipal and interest as long as they are considered to be recoverable. Servicers are also required, under differentrncontract obligations, to make advances against escrow for the payment ofrnproperty taxes and insurance.
When borrowers catch up with their backrnpayments or reimburse for advances against escrow, or when the loan isrnliquidated through foreclosure then the servicers take the money asrnreimbursements of the advances. If therernis a shortfall, the remaining advance can be recovered from the aggregated cashrnflow within the same trust.
Servicers need funding as a bridge forrnthese advance payments and have relied on credit mechanisms ranging from revolvingrnlines of credit secured by a pledge or sale of the servicer's advancernreceivables to various forms of securitization. When the banks hit the wall a year ago much ofrnthe more traditional financing, like all credit, became problematic at the veryrntime that delinquencies were escalating. rnConsequently securitization of these advance receivables has become morernof a factor.
These Servicers Advance ReceivablesrnTrusts (SARTs) are typically master trusts that are either cross collateralizedrnor single trusts with various kinds of notes. rnThere is usually a revolving period before the bonds begin to amortizernand in the interim the servicers utilize the lines to make advances to therninvestors of the underlying trust. Thernreimbursement of the advance is used to pay down the note.
Because servicers are first in line tornreceive reimbursement for advances as payments come in, or as Fitch Ratingsrncharacterizes it, at “the top of the cash waterfall,” the trusts based on thesernadvanced funding mechanisms are considered relatively safe, and Fitch says thatrnthe concern about these investments is largely based on the timing ofrnrecovery.
In rating these trusts, Fitch will focusrnon the transaction structure and on various servicer risk factors including historical performance of the servicers on recovering advances, and thernfinancial strength, operational condition, and Fitch rating of the servicerrnitself.
The historical background is considered separately for states withrnjudicial and non-judicial foreclosures as the former takes longer tornaccomplish. The data analysed by Fitchrnincludes the collection rate of the underlying trusts pledged to the SART andrnFitch wants to see at least four years of historical data even if that meansrnlooking at recovery rates from similar comparable recoveries in the servicersrnportfolio. Fitch also reviews otherrninformation such as pledged trusts deal summaries including current balances,rndelinquency status, monthly recovery sources, and foreclosure details.
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