Private-label mortgage securitizations with variable servicing fee arrangements could become more common going forward as issuers look to increase investor cash flow while reducing the loan servicer’s economic exposure, Fitch said.
Servicing fees on newly originated private-label mortgage-backed securities are lower than on precrisis bonds and might not be sufficient to cover servicers’ costs when severely stressed, Fitch noted.
“The new arrangements can better align servicer incentives with investor interests, but require adjustments to traditional RMBS cash-flow waterfalls to ensure the benefits and costs are allocated appropriately across bondholder classes,” the report said.
Some recently issued RMBS consisting of reperforming mortgages have a 25-basis-point servicing fee. But precrisis legacy securitizations typically had twice that amount.
“Some prime RMBS issuers have also introduced servicing fee strips below precrisis levels — in some cases as low as 8 basis points. The reduced post-crisis fee amount is driven, in part, by limited servicer advancing obligations, which reduces costs for servicers,” said the report.
Pools with lower average balances and higher credit risk are vulnerable to the costs of servicing the loan exceeding the fixed fee, especially if it becomes distressed. Transaction documents do give the MBS trustee the ability to increase the servicing fee to attract a subsequent servicer if necessary.
More recently, issuers like Flagstar and JPMorgan Chase have moved to a variable fee arrangement that will pay the servicer based on specific actions, Fitch noted.
“This arrangement can better align the payments from the trust with costs incurred by the servicer, and also better align servicer interests with investor interests by paying servicers incentive fees for positive loan resolutions,” the report said. “Importantly, the Flagstar and JPMorgan transactions are structured so credit performance related servicing costs are incurred by subordinate classes in reverse sequential order, consistent with a traditional allocation of credit risk.”