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Methods for success
In addition to merely keeping themselves well-informed about the functioning of the MBS market, bankers and correspondent lenders should have a clear idea of how advancing loans function within their individual organizations. With that in mind, consider the following business scenario for advancing loans.
Let’s say that a group of loans is delinquent and, without remediation, would eventually move down the distressed-asset curve. That is, borrowers would move from being severely delinquent to foreclosure and then to REO.
From the trust’s perspective, the balance would decline because the servicer would be remitting the principal and interest. They would reimburse themselves once the loan became current, was modified or when the property was sold out of the bank’s REO portfolio.
To estimate total monthly advances, the user must determine scheduled monthly payments for each relevant mortgage. A user can come reasonably close to the servicer advance number by applying the following logic to the loan data set that is available in the public domain:
Look for loans where the ending scheduled balance (i.e., the trust balance) has declined while the actual balance (i.e., the borrower balance) is stagnant and different from the scheduled balance.
Once those loans have been identified, add up the scheduled principal and interest for the relevant loans and compare that number to the summary number as held in the remittance report.
With additional effort, a user can get even closer to the number reported by the bond trustee. Regardless, this estimation gives users a reason to follow up with the servicer and for the bond trustee to take a closer look at reported numbers.
Bringing the logic to the next level, users also can estimate loans where the servicer has stopped advancing, providing insight into which loans may be in the worst shape. A similar procedure to identify servicer reimbursements may entail the following:
Identify loans where the servicer has advanced principal and interest.
Calculate the amount of advanced principal and interest.
Determine advancing loans that have been modified because of their delinquency status being switched to current, and determine loans that have voluntarily or involuntarily liquidated. For these loans, calculate the advanced principal and interest since the last time they were current.
If you wanted your analysis to be even more thorough, you also could estimate the amount of money the servicer spent on maintaining an REO property and preparing it for sale using industry norms. Regardless, using this approach can help you determine a reasonable reimbursement for a given period.
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Although not explicitly reported by bond trustees at the loan level, servicer advances and reimbursements can be estimated from loan-level data. The ability to estimate advances and reimbursements will vary according to the quality of the loan-level data provided by the bond trustee, but the attributes used in the calculations generally are available.
These numbers also can add predictive lift to default, prepayment and loss modeling by bringing in another input into the predictive cash flow generators and providing insights into loss estimates made by servicers. Further, mortgage bankers and correspondents can use this analysis to gain additional insight into the correlation between the initial underwriting and subsequent loan performance while simultaneously reviewing the relative performance of a given servicer.
Larry Barnett is a co-founder and principal of BlackBox Logic LLC.
Barnett is one of the chief data architects and is responsible for long-term strategies at BlackBox. He is well-known as an expert in securitization, secondary market operations and bond administration. Before working at BlackBox, Barnett was the officer in charge of Securities Trading Operations at Fannie Mae, where he was responsible for the MBS Operation and Bond Administration. Reach him at email@example.com.
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