Fitch Releases Criteria on Servicer Risk Factors

With mortgage delinquencies increasing exponentially at the same time credit was drying out, servicers have had a bit of a double whammy making contractually obligated advances on the loans they are servicing.  One financing method that has been used in recent years is Servicer Advance Receivables Trusts (SARTs).  Now Fitch Ratings has released criteria by which is will be rating these SARTs.

As background, when servicers have loans in their portfolios which are collateral for residential mortgage backed securities (RSMB), those servicers must remit payments to the investors each month even when mortgage payments have not been made.  The servicer must make these payments of principal and interest as long as they are considered to be recoverable.  Servicers are also required, under different contract obligations, to make advances against escrow for the payment of property taxes and insurance. 

When borrowers catch up with their back payments or reimburse for advances against escrow, or when the loan is liquidated through foreclosure then the servicers take the money as reimbursements of the advances.  If there is a shortfall, the remaining advance can be recovered from the aggregated cash flow within the same trust.

Servicers need funding as a bridge for these advance payments and have relied on credit mechanisms ranging from revolving lines of credit secured by a pledge or sale of the servicer's advance receivables to various forms of securitization.  When the banks hit the wall a year ago much of the more traditional financing, like all credit, became problematic at the very time that delinquencies were escalating.  Consequently securitization of these advance receivables has become more of a factor.

These Servicers Advance Receivables Trusts (SARTs) are typically master trusts that are either cross collateralized or single trusts with various kinds of notes.  There is usually a revolving period before the bonds begin to amortize and in the interim the servicers utilize the lines to make advances to the investors of the underlying trust.  The reimbursement of the advance is used to pay down the note.

Because servicers are first in line to receive reimbursement for advances as payments come in, or as Fitch Ratings characterizes it, at "the top of the cash waterfall," the trusts based on these advanced funding mechanisms are considered relatively safe, and Fitch says that the concern about these investments is largely based on the timing of recovery. 

In rating these trusts, Fitch will focus on the transaction structure and on various servicer risk factors including historical performance of the servicers on recovering advances, and the financial strength, operational condition, and Fitch rating of the servicer itself.

The historical background is considered separately for states with judicial and non-judicial foreclosures as the former takes longer to accomplish.  The data analysed by Fitch includes the collection rate of the underlying trusts pledged to the SART and Fitch wants to see at least four years of historical data even if that means looking at recovery rates from similar comparable recoveries in the servicers portfolio.  Fitch also reviews other information such as pledged trusts deal summaries including current balances, delinquency status, monthly recovery sources, and foreclosure details.