Servicer advances are a customary feature of residential mortgage securitization transactions and represent one of the duties for which a servicer is compensated through the basic fee component of the related MSR, since the advances are non-interest bearing. Servicer advances are generally reimbursable cash payments made by a servicer (i) when the borrower fails to make scheduled payments due on a mortgage loan or (ii) to support the value of the collateral property. The purpose of the advances is to provide liquidity, rather than credit enhancement, to the underlying residential mortgage securitization transaction. Servicer advances are usually repaid from amounts received with respect to the related mortgage loan.
Advances are typically “top of the waterfall”; first in line to be repaid and thus are very high credit-quality. Furthermore, we expect advance balances to decline substantially over time as delinquencies continue to improve and foreclosure timelines normalize. We believe advances will provide an opportunity for us to invest in core servicing assets that generate attractive yields.