Introduction to Securitization

SERVICING TRANSITION

Securitization transactions are presumably independent of the originator due to the legal isolation the transaction achieves due to “true sale.” However, the truth of the sale might turn out to be a glib illusion if the servicing platform is so intimately originator-dependent that it is difficult to perceive its transfer. Transferability of servicing has been a key issue in several securitization transactions, either because the servicing fees were impractically fixed or because the servicing was intrinsically dependent on the originator’s organization.

Conseco Finance’s securitization transactions showed that impractical fixation of servicing fees can disrupt the performance of a transaction. As one would presumably do when the originator is the servicer, the servicing fees were subordinated, and were meager. When Conseco filed for bankruptcy, the servicing had to be transferred. The servicing fee was 50 basis points and it was subordinated, which means the servicer would get nothing unless there was an excess spread. This is a kind of “onerous asset” that can be avoided in bankruptcy proceedings, which is what the company pleaded before the court. The court increased the servicing fee to 125 basis points and made it senior to the noteholders, thereby reducing the excess spread of the transaction.

There have been some cases where successful transfer of servicing function has been possible, such as when Guardian Savings and Loan failed, wherein Financial ...