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Eyeing Securitized Residential Servicing Advance TALF Deals

Securitized residential mortgage servicing advance receivables transactions are being done through the government's Term Asset-Backed Securities Lending Facility.

Last week, when last month's window for the deals opened, there was one $34.4 million deal of this type. The previous month, when the first deal was done, there was a transaction that was about $500 million in size.

Like the rest of the term securitization market targeted by TALF, the securitized servicing advance market has been in need of assistance in part because it has been through "a dry spell," said Rudene Bascomb, partner at Hunton & Williams, New York, the law firm that represented the servicer and affiliated issuer involved in the first servicing advance TALF deal. "When delinquencies skyrocketed, it created a huge financial burden for servicers," said Tom Hiner, lead partner at Hunton & Williams.

Because of wide bid-ask spreads in the securitized advance market "some servicers ... couldn't afford to use it to meet their finance obligations," he said.

For those who may need a more basic description of servicing advances: these are the payments made by servicers up front for delinquent principal and interest, escrow, taxes, insurance premiums etc., used in maintaining mortgaged properties.

When securitized, these principal-only receivables must be structured so that investors can receive them as principal and interest payments on bonds.

Mr. Hiner, whose firm has been a servicing advance securitization specialist for roughly the past decade, said the first TALF servicing advance deal was layered onto a transaction that had been executed during one of the worst times in the market, during the second half of last year. Proceeds of that TALF deal were used to refinance some but not all of notes issued in original transaction at a lower cost.

The first TALF securitized residential servicing advance deal was a sale of medium term notes serviced by American Home Mortgage Servicing Inc. It was issued through AH Mortgage Advance Trust 2009-ADV1 and secured by a revolving pool of servicing advance receivables.

Ms. Bascomb said Hunton and Williams' role in the transaction included describing pertinent risks to investors, such as the timetable for recovery of advance reimbursement and how this could affect their ultimate repayment. She said TALF adds some bells and whistles to servicing-advance deal structuring work, but generally is user-friendly and accommodates pre-existing structures, even though those structures themselves tend to be relatively complicated. The complications lie in the fact in that the structuring of the advance financing facilities tends to involve some complex bankruptcy and tax issues, among other things.

But Hunton & Williams has "done a lot of these before and knows how to get them done," said Mr. Hiner.

The firm has handled about 40 servicing advance deals, Mr. Hiner and Ms. Bascomb said. How many have been done in total is difficult to pin down because many have been done privately.

The first TALF deal was done under Rule 144A.

Servicing advance transactions have been structured in various ways over time, they said.

These have ranged from revolving lines of credit or repurchase facilities secured by a pledge or sale of the servicer's advance receivables attributable to specified servicing agreements to structured transactions, according to the law firm.

A situation in which servicers entitled to receive advances for reimbursements use the rights to these advances to secure notes issued through a special purpose entity is just one generic example of how a transaction might be structured, Ms. Bascomb said.