Thursday, January 10, 2008

Loan Servicers Advancing Interest, Paying Taxes and Insurance

by Bill McBride on 1/10/2008 01:01:00 AM

A few people have asked me about this article from the LA Times: Lender stung by fears on finances

Delinquent loans create huge liquidity problems for loan servicers like Countrywide because the servicer becomes a middleman between the borrowers and the people who bought their loans.

When the borrower misses payments, as a record number of Countrywide's borrowers are doing now, these contracts require that the company advance those missed payments to investors until it's clear that the amounts won't be recovered.

With Countrywide having a $1.5-trillion servicing portfolio, that puts tremendous strain on its cash flow, Cannon said.
UberNerds already knew all this. From Tanta (February 2007): Mortgage Servicing for UberNerds
... the other side of “float” for the servicer is the usual requirement that the servicer advance interest (and possibly principal, although that’s less common) to the investor when it is “scheduled” to be due but wasn’t actually paid by the borrower. You’ll see, for instance, the term “scheduled/actual” used to refer to a servicing arrangement. That means that the servicer must pass through all scheduled interest each month, whether collected from the borrower or not, but only actually collected principal. Most deals these days are S/A or S/S. (A/A exists, but it’s like “with recourse,” which we talked about on a prior thread. It takes a very well-capitalized, high-risk tolerance investor to accept an A/A deal; most of the ones I see these days are old Freddie Mac MBS that are down to six loans each and just won’t die until the last payment is made.)

Having to advance scheduled interest offsets the float; it’s another way to balance the incentives. It really starts to matter when we get to this thing called “nonaccrual.” Basically, a usual servicing contract will require the servicer to advance interest until the loan is more than 90 days delinquent, after which it is placed in “nonaccrual” status, meaning it is deemed uncollectable and no more interest has to be advanced.
...
Even if the servicer no longer has to keep advancing scheduled interest, though, it has to keep paying property taxes and insurance, if the borrower isn’t paying it, until the property is sold. It also has to cover the other expenses in a foreclosure (unless the contract specifies that the investor or mortgage insurer will advance for certain costs) until the final payday.
emphasis added
You can access Tanta's UberNerd series from the menu bar: The Compleat UberNerd

I believe the top five servicers are, in order, Wells Fargo, Countrywide, WaMu, Citigroup and Chase.