Residential mortgage servicers play a crucial role in the U.S. residential mortgage loan market. Servicers, broadly speaking, are responsible for collecting principal and interest payments, protecting the underlying collateral and lien positions, remedying defaults, and in some instances, advancing principal and interest to investors if borrowers do not make their payments. Rather than performing these day-to-day servicing functions, some owners of mortgage servicing rights (MSRs) outsource these practical duties to a third party and take on the role often referred to as a master servicer. MSR owners could include owners of loans purchased or securitized via Fannie Mae and Freddie Mac, or securitized via Ginnie Mae (collectively, these are referred to as agency mortgages with associated agency MSRs).
Because agency MSR owners often engage a subservicer while taking on a master servicer role, market participants should be aware of the important differences in function, complexity, and internal variability between an agency MSR owner that assumes a master servicer role and a named master servicer in private-label residential mortgage-backed securities (RMBS). We refer to the former as an agency master servicer and the latter as a private-label RMBS master servicer.
Agency Master Servicers
In recent years, the residential mortgage loan market has been dominated by agency loans. As of third-quarter 2023, U.S. residential mortgage debt outstanding increased to a total of just over $12 trillion, according to the Federal Reserve Bank of New York. Of this amount, roughly 65% is securitized in the form of RMBS, with the bulk of issuance coming from agency loans, implying that the majority of servicing arrangements fall under an agency framework.
MSR owners in the agency space assume a master servicer role that is devoted mostly to oversight, as they outsource some or all of the servicing functions through subservicing arrangements. This means that the subservicer carries out the servicing functions, including principal and interest collections and reporting to investors. Despite outsourcing these servicing functions, an agency master servicer remains the contractual servicer and is still required to meet the respective agency's servicer or issuer eligibility requirements.
To manage risk, agency master servicers typically have loan-level visibility to monitor the portfolios, either through access to the subservicers' systems, periodic reporting feeds, or both. On top of loan-level visibility, agency master servicers often incorporate practices such as quality control testing programs, periodic operational reviews of subservicer performance, and in-depth onsite (i.e., in-person) reviews to ensure the subservicer is managing the portfolio in a manner that adheres to the respective servicing requirements.
Private-Label RMBS Master Servicers
In the case of private-label RMBS transactions, the requirements for a named master servicer as part of the securitization tend to be "hands on" and can vary, depending on the transaction. Some of the functions typically carried out by traditional master servicers in the private-label securitization space may include:
- Understanding servicing-related contractual obligations under the trust agreements (i.e., pooling and servicing agreements).
- Bond administration, reporting, and transmission of remittances to trustees or other parties as dictated in the trust agreements.
- Backup principal and interest advancing should the primary servicer be unable to meet its advancing obligations, if required by the trust documents.
- Shadow-servicing by maintaining parallel loan transaction information on an accounting system to track loan-level accounting (e.g., payment amortization schedules).
- Approving loss mitigation workouts and real estate-owned (REO) asset sales when required by the trust agreements.
- Ensuring primary servicers meet eligibility requirements under the trust agreements, which may include assessments of errors and omissions (E&O) and/or directors and officers (D&O) insurance coverage, financial strength/liquidity requirements, minimum servicer rankings/ratings, among others.
- Providing back-up servicing in case the primary servicer experiences an event of default.
- Reviewing primary servicer claims and ensuring that they are recoverable according to the terms of the trust agreements.
Agency And Private-Label RMBS Master Servicer Roles Are Significantly Different
In summary, private-label RMBS master servicers are required to be "hands on" as a securitization party, performing specific duties required under the trust agreements, while agency master servicers instead perform an oversight role, ensuring the associated subservicer is managing the portfolio in a manner that adheres to the respective servicing requirements. So, despite the superficial similarity of sharing the label "master servicer," the roles of the private-label RMBS master servicer and the agency master servicer vary greatly in terms of skill sets, staffing resources, technology systems, and regular processes.
Related Research
- Select Servicer List, Jan. 22, 2024
- Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019
This report does not constitute a rating action.
| Servicer Analysts: | Jason Riche, Dallas + 1 (214) 468 3495; jason.riche@spglobal.com |
| Adam J Dykstra, Columbia + 1 (303) 721 4368; adam.dykstra@spglobal.com | |
| Robert J Radziul, New York + 1 (212) 438 1051; robert.radziul@spglobal.com | |
| Research Contact: | Tom Schopflocher, New York + 1 (212) 438 6722; tom.schopflocher@spglobal.com |
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