Search for yield drives mortgage servicer advance ABS

Fri Feb 15, 2013 12:24pm EST

Feb 15 (IFR) - The investor hunt for yield in the current low-rate environment has injected life into yet another off-beat investment vehicle - the so-called servicer advance ABS.

The product repackages advances given by residential mortgage servicers to cover payment defaults of home loans that are already part of an existing securitization deal.

Earlier this week, Nationstar Mortgage raised US$300m by securitizing advances that covered defaults on previously securitized mortgage loans backed by Freddie Mac and Fannie Mae.

This took the volume of servicer advance ABS so far this year to US$1.45bn - just US$150m shy of the total for the whole of 2012.

Indeed, many bankers are expecting 2013 to be a watershed year for new issuance of servicer advance ABS, with volumes as high as US$10bn.

In part, the sector has been fuelled by tighter capital regulatory requirements for banks in the wake of the financial crisis.

Many banks have had to sell their servicer advance portfolios to non-financial institutions, which can only fund themselves through the issuance of new debt.

According to a report from Credit Suisse, Nationstar's portfolio of residential mortgage servicing rights had more than tripled by the end of January over one year earlier, to a total value of US$435bn.

BUILT TO LAST

Investor confidence in the servicer advance ABS asset class has surged since the instrument made its debut in the markets in 2003, even despite the subprime mortgage meltdown.

Mortgage servicers provide funds to cover coupon payments to investors in MBS that have securitized mortgages, when there are defaults in the underlying mortgage payments.

As mortgage defaults skyrocketed in the subprime crisis, servicer advance ABS had widely been expected to suffer amid doubts that the servicers could recoup their advances.

But according to Credit Suisse, not a single servicer advance ABS deal has taken any losses to date - an astonishing record that has significantly broadened support for the asset class.

Bankers say safeguards built into these ABS have insured the instruments' survival.

Servicers only give advances against loans that are deemed to be recoverable, and they stop giving advances the moment they realize the loan is not recoverable.

If the servicer cannot recover the advances on a particular loan, it can take the cashflows from other loans included in the pool backing the existing mortgage-backed security (MBS).

This ensures the recovery levels for a servicer are high, and drastically reduces the risk for investors in the servicer advance ABS.

Other safeguards include liquidity tests as well as performance-based early amortization markers that trigger repayment to investors.

"There are several structural mitigants to protect investors' interest as performance and market-related events occur," said Michael Dryden, co-head of global real estate and mortgage finance at Credit Suisse.

"Investors are increasingly seeing the value in such transactions, prompting a sharp tightening of spreads, longer revolving periods and the ability to sell further down the capital structure."

In the recent deal, for example, Nationstar issued two series of notes that had six tranches each rated from Triple A to Single B. All found strong demand because they offered a decent yield pick-up to other ABS asset classes.

The Triple A rated 2.04-year average life notes paid a yield of 1% - attractive when compared to a credit-card receivable backed ABS that paid 1.313% for a 4.98-year average life Triple A rated tranche.

These levels were significantly tighter than those achieved last year.

In October, HLSS priced a Triple A rated 0.99-year average life tranche at 1.35% yield, while it paid a yield of 2% for another 2.99-year Triple A rated tranche.

Market sources say top non-bank mortgage servicers like Nationstar have been actively acquiring advances over the past couple of years, which will mean continued ABS issuance in the months ahead.

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