NEW YORK–In a new report Moody’s is raising concerns around an emerging challenge facing residential mortgage services, including credit unions, over the “extraordinary increase in servicer advances likely to materialize because of the establishment of borrower forbearance arrangements” being mandated by a number of government entities.
According to Moody’s, servicer advance obligations rise with borrower delinquencies and under forbearance plans because servicers must advance principal and interest payments, and typically tax and insurance payments, to mortgage loan securitization trusts when the borrowers are unable to make their monthly payments.”
Those servicer advance obligations are significantly higher for servicers of Ginnie Mae loans, which must advance for a longer period (through foreclosure) rather than for the 120-day period for government sponsored enterprise (GSE) loans, Moody’s added.
The analysis did note that mitigating the concerns with servicers’ ability to manage the projected increase in servicer advance obligations is the availability of credit facilities (even during the housing crisis) for many of such advances and the industry’s focus on the issue, and that the federal government is focused on addressing the risk.
“Crisis-related market volatility and limits on production are eroding the already modest current profitability of non-bank mortgage companies, but we expect higher origination volumes and strong gain-on-sale margins to drive a recovery in earnings in late 2020,” Moody’s said.
Negative Outlook
Meanwhile, Moody’s has revised to negative from stable its outlook for non-bank mortgage companies in the U.S. as a result of the coronavirus pandemic. It is also expressing concern over what the government-mandated mortgage forbearance programs are going to mean for all lenders.
“Our baseline scenario is that over the next several quarters non-bank mortgage firms will face ongoing liquidity stress, weaker profitability, as well as declines in capitalization and asset quality,” Moody’s said in its latest analysis. “However, over the full 12-18 month outlook horizon, non-bank mortgage firms with solid origination franchises should be able to weather the increased servicing costs resulting from higher delinquencies and servicer advance obligations. The solid profitability of these firms’ production segments – driven by higher origination volumes and strong gain-on-sale margins– should more than offset higher servicing costs over the outlook period.”
Moody’s said the liquidity of non-bank mortgage companies, which the company noted it has long identified as a key sector weakness, will remain under substantial pressure over the next several quarters, during which we expect the operating environment to remain challenging.
‘Severity’ in Markets
“These firms are highly dependent on short-term secured repurchase facilities, which are subject to margin calls, exposing the companies to considerable liquidity risk if the values of the pledged assets, which are marked-to-market daily, decline,” Moody’s said. “For larger non-bank mortgage companies focused on origination and servicing, the margin calls for repurchase facilities, as well as for origination hedges and credit facilities for mortgage-servicing rights (MSRs), have largely been manageable thus far. However, several investment mortgage REITs have had to execute sizable asset sales to meet outstanding margin calls, reflecting both the severity of the market stress and these firms' fragile liquidity profiles.”