For many of us who have been around for a while, it seems as if we have seen this movie before. An economic downturn leads to increased borrower delinquencies on mortgage loans with a progressively increasing obligation for the servicers of those mortgage loans to make principal and interest advances to cover the delinquencies.
But this time, the actors are different and the plot will develop much more quickly.
Last time, delinquencies rose as economic circumstances progressively deteriorated, almost like rising floodwaters breaking out of their riverbank. Along with rising delinquencies, prepayments slowed progressively, gradually putting pressure on nonbank mortgage servicers’ needs to keep advancing into the deals they serviced to keep principal and interest payments current without the ability to borrow from prepayments to do so. Most servicers had commercial bank lines set up to fund their advances as they became “net borrowers” in order to meet their advancing obligations. At that time, nonbank servicers were primarily servicing private-label securitizations and so the GSE overlay, although present, was much less significant.
Reprinted from National Mortgage News.