Introduction to Securitization

BACKUP SERVICER

As is evident from difficulties faced in several transactions, the portability of the servicing is itself a problem, and more significantly, the willingness of the backup servicer to pick up servicing as per terms assumed in the transaction cannot be assumed. Adequate backup servicing arrangements is key to the transaction.

Backup servicers may be classified into hot, warm, and cold. The jargon comes from information technology business where these terms are used for backup servers. A hot backup servicer is a sort of an alternate that keeps itself in absolute readiness to take over the servicing anytime. Generally, a hot backup will upload collateral data from the primary servicer more frequently, often weekly, and in many cases will shadow service the assets in question to assure the most seamless transfer possible should the need for the same arise. Obviously, hot backup servicers are quite expensive to retain.

Warm backup servicers update data from the primary servicer less frequently, usually monthly, and therefore are less expensive to keep on standby.

Cold backups perform the least frequent monitoring of the primary servicing data, providing updates possibly quarterly or even semiannually.

As every backup arrangement implies a cost, one must take a practical view to organize the backup arrangement. However, a mere right to appoint a backup servicer, or a commitment on the part of a backup servicer to take over servicing, is meaningless unless accompanied ...