Fed Looks to Ease Burden of Servicing Advances

The Fed’s new Term Asset-Backed Securities Loan Facility (TALF) was expanded late Thursday to include asset-backed securities backed by mortgage servicing advances — the latest attempt by government officials to free up capital among strapped servicing operations being asked to shoulder much of the financial burden of bulk loan modifications and foreclosure moratoria. Mortgage servicing advances are loans extended by residential mortgage servicers to cover payments missed by homeowners; in particular, servicers must advance both principal and interest on delinquent and defaulted mortgages to investors until the borrower is considered re-performing, or the property is sold out of foreclosure. This presents two problems from any servicer’s perspective: the first is the credit facility needed to fund the advances, which can be substantial and is usually worth anywhere from four to as much as 15 times the actual value of the servicing strip. Recovery on servicing advances can take as long as 2 to 3 years, or even longer, depending on a variety of factors. The second is the interest carry cost the servicer must absorb relative to that credit facility; while P&I advances are eventually recovered, the servicer’s cost of doing business can largely swing on the interest float it must pay to maintain debt service on its own credit facility. The bottom line is that with so much available capital tied up in advances, servicers that have spoken with HousingWire say it’s tougher for them to execute loan modifications — which also involve up-front costs to a servicer. “Accepting ABS backed by mortgage servicing advances should improve the servicers’ ability to work with homeowners to prevent avoidable foreclosures,” the Fed said in a statement. The TALF expansion also includes ABS backed by loans or leases relating to business equipment, ABS backed by leases of vehicle fleets, and ABS backed by floorplan loans. The new categories of collateral will be eligible for the April TALF funding, the Fed said; details on the funding will be released on March 24. TALF, originally announced in November, was originally restricted to owners of assets backed by consumer loans, auto loans, student loans, credit-card receivables or small-business loans; it has faced some hiccups and delays in getting off the ground, with the first round of TALF requests coming in yesterday. The Federal Reserve Bank of New York said yesterday that it had received nearly $5 billion in requests from investors seeking to tap government funds under the initial TALF funding period; all requests were for the Fed to buy auto loan and credit card securitizations. “This is a good start for a program that we will continue to build on in the future,” said Federal Reserve Bank of New York president William Dudley. “It is encouraging that the spreads in the areas where the program is now focused have narrowed significantly. Our goal is to get the securitization market working again.” Write to Paul Jackson at [email protected].