The nation's foreclosure scandal may soon have a profound effect on residential servicers passing on principal and interest payments to end MBS bond holders, affecting the value of certain tranches.
According to a new research report on servicing advances from Amherst Securities, servicers advance "less on more delinquent loans" and thanks to the Robo-gate mess "we would expect servicers to re-evaluate their advancing policies and cut back more."
If servicers cut back on payments to MBS investors, especially on subprime bonds, it could make the "front sequential" tranches worth considerably less, while causing an increase in the value of "back" sequential tranches, writes Amherst.
Depending on the contract language, most servicers will advance funds to bond holders as long as they believe the money they put out is recoverable, though each servicer may have its own take, or policy regarding delinquent loans.
"Servicers are constantly updating their [loss] severity calculation, and will generally stop advancing well before expected loss severity hits 100%," the company said.
