Fitch: RMBS Servicers See Opportunity in 2020 Amidst ‘Clear Challenges’
Change is coming for U.S residential mortgage-backed securities servicers in 2020 and beyond, said Fitch Ratings, New York, with perhaps the most notable one being how they are preparing for the end of LIBOR.
At a recent RMBS Roundtable, Fitch said RMBS servicers showed an improving awareness of difficulties and implications tied to the anticipated expiration of LIBOR at the end of 2021.
“Primary and master servicers are engaged in reviewing existing loan documents and trust agreements in order to identify potential issues arising from the LIBOR transition,” Fitch said. “Servicers expressed concern over legacy trust documents where the index transition language is silent and there is a lack of clarity regarding the party that determines the replacement rate such as the servicing administrator, master servicer or note holders. Servicers are seeking guidance on how to communicate the index change to borrowers; however, most are hopeful that industry groups, GSEs and regulators will be successful in creating workable solutions.”
Acknowledging that the frequency of natural disasters is on the rise, roundtable attendees discussed how servicers are preparing for natural disasters and steps that they take to assist affected borrowers. Fitch said servicers use FEMA-designated disaster area notifications to assess the initial impact to their borrowers. Strategies servicers employ include waiving late fees, temporary credit bureau reporting cessation and short-term forbearance plans. The GSEs, as well as private investors, have policies that address most disaster scenarios and such policies have been institutionalized across the mortgage servicing industry.
Fitch said servicers largely agreed that while natural disaster frequency has increased, the impact to their portfolios has so far been minimal.
In recognition of the increasing market position of non-bank lenders and servicers, servicers discussed the challenges of the non-bank servicer model. While mortgage delinquencies are at historic lows, the prospect of an eventual economic downturn and the impact it poses to the non-bank servicer model was discussed. For instance, banks are subject to liquidity stress tests, but non-bank servicers are not subject to those requirements and maintain liquidity from investors and clients, which, in a stressful environment, can jeopardize advance facilities. On the other hand, the participants noted that a well-capitalized investor parent could serve to minimize liquidity risk for a non-bank servicer subsidiary.
Further, several servicers described a growing interest in business diversification – especially as a strategy for non-bank entities that can realize additional revenue streams from ancillary businesses that would provide additional capital to enhance liquidity. The industry has incorporated improved controls for servicers with ancillary business subsidiaries post-crisis to avoid business conflicts, and servicers foresee this diversification trend continuing for non-bank entities to remain revenue positive.
Technology continues to play an integral role in the industry and servicers are implementing automation enhancements to maximize efficiencies that include eMortgages, artificial intelligence and robotics. While only a few Fitch-rated servicers are servicing eMortgages at this point, they indicated their experience has been trouble-free, though there are start-up costs involved. Servicers indicated that they expect the eMortgage trend to continue as loan originators drive the demand for eMortgages.
Ultimately, Fitch said, the industry is expected to embrace new digital technologies where it supports clear efficiencies and a cost-benefit. “Ultimately however, servicers that are most effective in leveraging technology to directly embrace challenges such as the anticipated LIBOR transition, periodic catastrophes, and industry competition are more likely to be successful in 2020 and beyond,” it said.