The inability of ResCap to pay investors is a sure sign that Ally Financial is no longer looking to offer support to the mortgage servicer.
In what is not a good sign for the bond markets, MorningStar predicts that mortgage servicers shorting investors (something called a clawback) will likely increase in popularity.
Under most pooling and servicing agreements, the mortgage servicer is entitled to take money from interest payments on mortgages, if it can calculate that it needs the money more than investors.
That could be the case here, where ResCap is looking to stay afloat for as long as possible. Though instead of using a clawback facility, ResCap may simply be out of money.
For other mortgage servicers times are tough enough.
“Extended foreclosure timelines are increasing the costs to servicers and declining house prices are decreasing the likelihood that liquidation proceeds will be sufficient to cover the cash already advanced,” Morningstar said. “Servicer compensation has been minimal in even the rosiest of housing scenarios.”
Most mortgage servicers are familiar with interest shortfalls, as Morningstar indicates in the below pie chart.
However, clawbacks are still comparatively rare. In one case, the mortgage servicer recovered just more than $180,000 from a clawback, in a residential mortgage-backed securitization with a current principal balance of approximately $80 million.
Yet, if we see more and more of mortgage servicers missing payments, the damage to the secondary market could be disproportionately damaging to the RMBS investor base.
The investors, after all, rely on the predictability of their fixed-income investments.
