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
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
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
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
Bankers say safeguards built into these ABS have insured the
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
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
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
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
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