Stacking up servicer behavior across mortgage credit
admin | July 16, 2021
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
As borrowers in RMBS trusts rolled into forbearance last year, it became increasingly apparent that treatment of these loans would vary across servicers and across different types of mortgage credit. And now as these forbearance plans have begun to expire, differences in servicer treatment of loans exiting forbearance have started becoming clear as loans roll back to performing or towards foreclosure.
Unlike servicers of Fannie Mae, Freddie Mac and Ginnie Mae loans, servicers of loans in private-label trusts have significantly more latitude in the treatment of loans in forbearance. The duration of forbearance terms, extension of those terms, classification of borrowers in payment forbearance to trustees and advancing policies have diverged significantly across servicers. Some of the key differences across servicers have been whether they have reported a borrower as delinquent while in forbearance or employed capitalization modifications and continued to mark the borrower as current. And even in the case where the borrower is marked as delinquent, there are noticeable differences in the amount of loans where the servicer makes a full advance of principal, interest, taxes and insurance to the trust.
Breaking down the non-QM sector
Looking at recent roll rates broken down by servicer shows that across the June remittance cycle, migration of loans out of late-stage delinquency varied somewhat meaningfully across different servicers of non-QM loans. Some servicers saw a relatively large population of previously seriously delinquent loans roll to back to current while others saw an outsized population of loans begin to roll towards foreclosure. Loans rolling back to current require further examination as those loans may be marked as current as a result of different types of borrower or servicer action. Loans may be marked as current as a result of a borrower self-curing, having their payment capitalized or by receiving a permanent loan modification, all of which will have different implications for future cash flow available to the trust.
An analysis of roll rates on previous seriously delinquent loans across major non-QM servicers shows that servicers like Nationstar and Shellpoint saw meaningful amounts of previously delinquent loans roll back to current while others like Fay and SPS saw relatively outsized amounts of loans roll to foreclosure. Admittedly, looking at a 1-month roll rate creates a small population of observations. However, it may provide valuable insight to how different servicers may treat the larger population of loans still in forbearance (Exhibit 1).
Exhibit 1: Tracking delinquency rolls across non-QM servicers
A further analysis of borrower or servicer actions that caused loans to roll back to current pay status shows somewhat meaningful disparities across servicers, Breaking loans into four buckets; self-cure, capitalization modification, rate modification or other modification shows that some servicers had relatively large amounts of loans self-cure while others relied on some type of modification to re-perform borrowers. Nationstar saw the largest percentage of previously delinquent loans roll back to current in June as over 20% of those delinquencies rolled back to current last month. More than half of those loans, or 13% self-cured while an additional 1.5% received a capitalization modification and another 5.5% were reperformed using another form of modification. (Exhibit 2)
Exhibit 2: Breaking down borrower and servicer behavior on delinquency cures
Breaking down the NPL/RPL sector
Applying the same framework to the RPL sector shows that some servicers stood out with regards to the amount of loans that cured or transitioned to foreclosure as well. In terms of servicers that saw outsized amounts of loans cure in the June remittance cycle, Citi, SPS, Ocwen and Shellpoint all saw relatively large percentages of loans roll from seriously delinquent to current last month as loans serviced by Citi experienced a 14% cure rate while loans serviced by SPS, Ocwen and Shellpoint saw cure rates between 8% and 9%. Conversely, Fay Loan Servicing and PHH saw relatively large amounts of loans roll to foreclosure. (Exhibit 3)
Exhibit 3: Stacking up cure and foreclosure rolls across RPLs
Digging in on what’s driving cure rates across the RPL sector shows that like the non-QM sector, the servicer with the largest amounts of loans curing was fueled in no small part by self-cure borrowers as more than half of re-performing loans serviced by Citi were self-cure borrowers. Looking across the gamut of servicers that saw relatively large amounts of loans cure last month, cure rates across Shellpoint serviced loans were a result of equal parts self-cures and capitalization modifications, while SPS relied primarily on capitalization modifications to re-perform borrowers and Ocwen primarily employed other forms of modifications. (Exhibit 4)
Exhibit 4: Digging in on drivers of cure rates in RPLs
Breaking down prime 2.0
Nominal delinquency rates in prime 2.0 are substantially lower than those exhibited in other cohorts, and as a result borrower and servicer behavior is likely particularly relevant to investors in thinner, more structurally levered subordinate cash flows where transition rates and the drivers of those rates may have outsized impact on those bonds. Given the relatively pristine nature of prime borrowers, cure rates across servicers were by and large much higher than those witnessed in the non-QM and RPL cohorts. Additionally, rolls to foreclosure from late-stage delinquency were almost non-existent in prime collateral last month irrespective of servicer. (Exhibit 5)
Exhibit 5: Prime 2.0 collateral exhibited elevated cure rates in June
Of servicers that saw the largest amounts of loans transition from seriously delinquent to current, those transitions were almost exclusively driven by borrowers exiting forbearance and re-performing without a modification. Prime servicers like Nationstar, Provident, First Republic and Quicken all saw 100% of re-performing borrowers self-cure last month. Other servicers like Cenlar and SPS relied on roughly an even split of self-cures and capitalization modifications to return borrowers to current while United Shore relied solely on alternative forms of modification to get borrowers back to current status (Exhibit 6)
Exhibit 6: Self-cures drive re-performance in prime 2.0
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