EXCESS SERVICING IOs
The excess servicing IO trust is an offshoot of the IO market discussed earlier in this chapter. The logic behind the creation of these deals is unlike the other techniques mentioned previously, since it is not based on taking loans and redistributing their cash flows to improve execution. Rather, it is a means of distributing interest cash flows to investors that are created as part of the pooling process. Instead of holding excess servicing, originator/servicers use the excess servicing IO trust as a means of liquefying their balance sheets and free up capital by efficiently distributing the excess servicing asset to investors.
In Chapter 2, we discussed the process of pooling loans. Excess servicing is the cash flow strip off individual loans securitized in agency pools, as part of the process of pooling loans. This portion of the mortgage servicing right (or MSR) is a result of the process of creating fixedcoupon pools from loans with a variety of note rates. Excess servicing is analogous to IO cash flows in that it represents part of the stream of interest generated by each loan. (By contrast, the holder of base servicing typically accrues additional benefits, such as the names and addresses of borrowers for cross-marketing purposes, as well as interest earned from holding payments such as property tax impoundments.)
There have been markets for unsecuritized servicing for many years. Like the market for raw loans, trading excess servicing assets ...