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 Security Assurance as the guarantor was able to have the servicing transferred. In the case of Spiegel and NextCard as well, the servicing fee was too low to attract a backup servicer.

The portability of the servicing function is quite dependent on the nature of the collateral. For a further discussion, see Standard & Poor’s (2005b).