A growing share of government-sponsored enterprise loans are being serviced by non-bank mortgage servicers — a development that is putting the GSEs at risk.
Banks that have traditionally serviced home loans for Fannie Mae and Freddie Mac have been selling off the mortgage servicing rights on distressed loans in bulk.
On the other side of those transactions are non-bank special servicers, which have accumulated MSRs on around $1.4 trillion of the $10 trillion market.
That is according to FHFA Actions to Manage Enterprise Risks from Nonbank Servicers Specializing in Troubled Mortgages from the Federal Housing Finance Agency Office of Inspector General.
The report indicates that while troubled loan servicing is more labor intensive, these special servicers have less-stringent regulatory and financial requirements than banks.
An assessment by the OIG found that non-bank servicers acquire MSRs on troubled loans even though they only start to see returns only after long-term work to resolve difficulties. The problem with this is that such strategies can jeopardize the servicers’ operations and compromise timely payment guarantees by Fannie and Freddie. In addition, the secondary lenders’ reputations are jeopardized.
Another general risk is special servicers taking on more MSRs than their infrastructures can handle.
“For example, of the 30 largest mortgage servicers, those that were not banks held a 17 percent share of the mortgage servicing market at the end of 2013, up from 9 percent at the end of 2012, and 6 percent at the end of 2011,” the OIG said. “This rise in non-bank special servicers has been accompanied by consumer complaints, lawsuits, and other regulatory actions as the servicers’ workload outstrips their processing capacity.”
The report highlighted how Fannie and Freddie have been taking steps over the past three years to address such problems at non-bank servicers.
In particular, one servicer began buying large volumes of MSRs in addition to the MSRs on billions of dollars in loans already in its pipeline.
Freddie determined in 2011 and 2012 that the servicer warranted increased oversight due to concerns about its MSR growth, while Fannie began to focus in 2012 and 2013 on that servicer’s failure to document its ability to service the volume of loans it planned to acquire.
Although FHFA approved the MSR transfers for the servicer under the condition that Fannie and Freddie increase surveillance and review its servicing operations, the servicer’s infrastructure proved inadequate to properly service some of the loans.
“Both enterprises separately sent their respective review teams to this servicer and found operational risks related to weak infrastructure such as poor practices for handling borrower complaints,” the report stated. “Fannie Mae found the servicer had breached the enterprise’s minimum capital requirements.”
The servicer, which was not identified, has seen Freddie and Freddie suspend any further bulk MSR sales to the servicer. In addition, it will lose its ability to service Fannie loans unless it resolves the issue.
To address concerns, the servicer has sold MSRs.
A story in the Wall Street Journal suggests the servicer was Nationstar Mortgage LLC.
The OIG has concluded that the FHFA hasn’t established a risk management process to handle some the general risks posed by non-bank special servicers. The regulator has also neglected to set up an overall oversight framework.
FHFA should structure its oversight of non-bank special servicers and the controls utilized by Fannie and Freddie under a formal oversight framework to offset limited regulatory oversight of these servicers..
“FHFA generally agreed with OIG’s recommendations and is taking responsive action,” the report stated.
