The impact of the difference in missed payment advancing rates on RMBS can be pronounced when loan servicing is transferred from banks to non-banks, 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. Interest shortfalls can occur on the RMBS when a servicer recoups or 'clawbacks' prior advanced amounts. Fitch continues to see this cashflow volatility particularly when servicing has been transferred to large non-bank servicers with more conservative stop advancing policies.
US RMBS transactions typically contain a servicer advancing mechanism that guards against interest shortfalls on the notes if payment is delinquent. The servicer in RMBS deals typically must advance the payment to the trust; they often advance principal and interest until further advances are deemed non-recoverable. At property liquidation, the reimbursement of servicer advancing occurs prior to the distribution of any funds to the trust. As long as the advanced amount is less than the net proceeds of a property liquidation, the advanced amount is recoverable.
Bank and non-bank servicers for RMBS transactions typically follow the same general advancing guidelines. However, non-bank servicers generally make the determination to stop advancing earlier than bank servicers. On average, non-banks advance missed payments on only 40% of delinquent loans in the subprime sector while banks advance closer to 50%. In the prime and Alt-A sectors non-banks advancing rates for missed payments average 68% versus a bank average of 93%. More conservative assumptions primarily drive the lower non-bank advance rates.
Fitch will continue to monitor the advancing policies of the servicers and its impact on RMBS ratings.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
U.S. Structured Finance
U.S. Structured Finance
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Source: Fitch Ratings
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