The flow of payments on mortgages is not straightforward. The bank or lender that originates a mortgage is very often not the one collecting payments and dealing with nonpayment. That’s especially true for government-backed loans. When mortgages are sold to a government guarantor such as Fannie Mae or Freddie Mac, and then securitized, there is a corresponding mortgage-servicing right, or MSR. MSRs can then be sold or subcontracted.
Fannie or Freddie pay a fee to servicers. But the servicers are also on the hook to advance monthly mortgage payments to the ultimate investors who buy the loans via securitization bonds. These arrangements can be even more complex with subservicing deals.
Major banks like Wells Fargo and JPMorgan Chase also have servicer businesses. There are also publicly listed independent firms, such as Mr. Cooper Group, New Residential Investment and PennyMac Financial Services, that have grown into major servicers, according to figures compiled by Inside Mortgage Finance.
In good times, advancing those payments isn’t a big burden. Less than 3.8% of residential mortgage balances were delinquent at the end of 2019, the lowest quarterly rate since at least the 1970s, according to the MBA. But with forbearances skyrocketing, the potential need for advancing unfunded payments is enormous.