Home lenders are smarting these days as Fannie Mae and Freddie Mac make them repurchase bad loans. But a multibillion-dollar windfall, courtesy of the government-sponsored enterprises, will mitigate lenders' pain.
Fannie said last week that it will "expedite" reimbursement to mortgage servicers for the principal and interest payments they have advanced on $127 billion of chronically delinquent loans. The GSE had previously announced plans to buy those loans, all of which are four months or more past due, out of its securitized pools.
Though the buyout plan was principally undertaken to save Fannie money, it will also do so for the servicers.
"The servicers will get billions," said Walt Schmidt, a senior vice president and manager of structured-product strategies at First Horizon National Corp.'s FTN Financial Capital Markets in Chicago. "It will be cash transferred from Fannie/taxpayers to the servicers."
What's more, Fannie said the servicers will no longer have to make advances on this group of soured loans.
Freddie Mac is expected to similarly repay servicer advances on the $70 billion of loans the GSE is buying out of its pools.
Neither GSE returned calls seeking comment for this story.
Bose George, an analyst at KBW Inc.'s Keefe Bruyette & Woods Inc., said servicers could end up being repaid as much as $6 billion by the two GSEs.
The two largest residential mortgage servicers, Bank of America Corp. and Wells Fargo & Co., could recoup as much as $1 billion each, he said. "It's a moderate positive because they are getting some capital back."
Though the reimbursements will be smaller for other companies, he said, they will be more of a boon because financing advances is a greater burden on them.
While the large servicers fund advances out of low-cost deposits, smaller companies must rely on more expensive lines of credit, George said.
Securitization agreements require that, when borrowers fall behind, servicers must advance principal and interest payments to the GSEs, taxes to municipalities and insurance premiums to carriers, as well as bearing other costs.
This can go on until the borrower either becomes current or the property is foreclosed on, reclassified as real estate owned and liquidated.
"What happens when a property is sitting in REO and they need to have a property preservation company cut the grass or make repairs? It's the servicer who pays for that, so it's another area where the cash is going out the door," said Niraj Patel, a group president at ISGN Corp., a Bensalem, Pa., provider of mortgage technology and services.
Financing servicer advances has been a major expense, coming on top of the higher operating costs involved in dunning late payers.
"We're hitting a topic that is hurting lenders, which is the capital outlay at a time when servicer costs are high," Patel said. "This is a huge liability."
Fannie Mae said servicers will be paid back their advances over three to four months as it completes its repurchases of delinquent loans. Freddie has said it would do its repurchases in one fell swoop and bondholders would get their principal back this month and next.
The buyout plans stem from an accounting rule change that Fannie and Freddie adopted at the beginning of January.
Previously they would have had to write down the mortgages brought on to their books to steeply discounted market prices, resulting in serious hits to capital.
But under the new rule, Fannie Mae and Freddie Mac bring the securitized loans onto their books but do not have to mark them to market.
Hence it will be less costly for the GSEs to hold in portfolio loans that are 120 days or more delinquent than it would be to continue advancing the unpaid interest on the loans to investors (which the GSEs must do when bond payments are due and they have received no cash from the servicers).
Of course, the advances being repaid to servicers still pale in comparison to the volume of loans that the GSEs are expected to make lenders eat.
Chris Kotowski, an analyst at Oppenheimer & Co., has estimated that the four biggest servicers — Wells Fargo, Bank of America, JPMorgan Chase & Co. and Citigroup Inc. — face $21 billion in repurchase requests this year alone.