Just prior to the coronavirus outbreak in the United States, loan performance had been relatively strong. So the need to advance payments for delinquent borrowers was low, and there was less focus on financing those advances.
Now that advance rates are higher, companies are giving a lot of thought to using private facilities to specifically fund advances again, particularly in the Ginnie Mae market.
"What some companies are looking for is the ability to finance the Ginnie Mae MSRs themselves and the advances separately," said Eric Edwardson, a partner in Mayer Brown's consumer financial group.
For example, PennyMac in April announced that it was recently able to establish an offshoot of an existing MSR securitization facility for this purpose. As a company that primarily originates and services Ginnie Mae loans, which have higher than average delinquencies, it was pursuing advance-financing even before the coronavirus spread. The innovation proved to be timely and opened the door to a contractual adjustment at Ginnie that the government agency said could potentially be used to facilitate similar arrangements by others.
With the extent and duration of loan performance issues still uncertain, it's difficult to gauge how interested market participants will be in developing these facilities; but if problems with distressed loans increase, these types of facilities could, too.
While such facilities are beyond the reach of smaller players and represent a cost that may only look attractive once traditional warehouse and MSR financing is maxed out, they are an option for larger companies.
"What you'd like to see a company do is max out as much as they can on their [traditional warehouse line] repo facilities then, after that, max out as much on their servicer advance facilities," Kornfeld said.