The crux of the liquidity issue in mortgage servicing is that servicers of mortgages in securitized pools are required to continue making payments to investors, tax authorities, and
insurers when mortgage borrowers skip their payments. Servicers are eventually reimbursed
for these “servicing advances,” but they need to finance the advances in the interim.
The issue is especially acute for Ginnie Mae servicers. These servicers need to advance
more types of payments for much longer than GSE servicers. Ginnie Mae servicers, unlike
GSE servicers, may also be required to absorb credit losses (in some cases, potentially large
losses) on the underlying mortgages. Finally, obtaining private-market financing of servicing
advances is difficult (if not impossible) for Ginnie Mae advances, so servicers need to fund
the advances with cash from current operations.
Liquidity issues in servicing tend to unfold more slowly than liquidity issues in mortgage
originations: servicers can predict, with some accuracy, the amount of funds that they will
need. The worrying aspect of the current situation is that it has never been tested. The
Ginnie Mae market was much smaller, and primarily in the hands of banks, in the financial
crisis and aftermath. The Ginnie Mae market is now much larger, and primarily in the hands
of nonbanks who might not be able, in times of strain, to continue financing these advances
from cash, and might not be able to obtain financing from the private market.
During and after the financial crisis, servicers of private-label RMBS faced liquidity issues.
A financing market existed for the advances, but credit terms had tightened considerably.
The Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF) helped alleviate
these strains. A similar policy response would not be effective today, because a financing
market does not even exist for Ginnie Mae advances.
Background on servicing advances
The amount of exposure that servicers have to servicing advances varies by the type of
servicing contract, with servicers for Fannie Mae and Freddie Mac having relatively low
exposure, servicers of private-label mortgage securities having a fair amount of exposure,
and servicers for Ginnie Mae having substantial exposure. We summarize these provisions
Servicers of pools guaranteed by Fannie Mae and Freddie Mac are required to advance
principal and interest until the borrower is 120 days delinquent on the loan (Fannie Mae,
2017a, section A1-3-07). Servicers continue paying the property taxes, insurance premiums,
and foreclosure expenses associated with delinquent loans after that point, but servicers can
submit reimbursement requests for these expenses “as soon as possible” after incurring an
expense (Fannie Mae, 2017a, section E-5-01).
Servicers of private-label mortgage-backed securities are required to “advance monthly
principal and interest payments as well as property taxes, insurance, and maintenance costs
for delinquent borrowers” until the delinquency is resolved (Moody’s Investor Service, 2017).
Servicers can stop making advances for principal and interest once they deem that they will