We have previously reported on the Federal Housing Finance Agency’s concern that the recent explosive growth of nonbank specialty mortgage servicers may pose operational and liquidity risks to such servicers and put in jeopardy Fannie Mae and Freddie Mac (collectively, the Enterprises) that guarantee these mortgages.  In particular, FHFA concluded that the nonbank servicers’ use of short-term financing to buy servicing rights to troubled mortgages has been accompanied by consumer complaints, lawsuits, and other regulatory actions as the servicers’ increased workload outstrips their processing capacity.  Furthermore, short-term financing puts nonbank servicers’ liquidity at risk because most troubled mortgages may only begin to pay out after long-term work to resolve their difficulties.

To address these concerns, on December 1, the FHFA issued Advisory Bulletin No. 2014-07 titled “Oversight of Single-Family Seller/Servicer Relationships” (“the Advisory”).  The Advisory emphasizes that the Enterprises’ boards of directors are directly responsible for overall risk management arising from mortgage servicing and that the use of third-party nonbank servicers does not relieve the Enterprises of their respective responsibilities.  Prior to entering into a contractual relationship with mortgage servicers, the Enterprises are expected to evaluate and document their assessment of several risk categories by examining a multitude of factors, among which are the following:

  • Financial risk factors due to the servicer’s inability to meet its financial obligations.  The Enterprises must assess: the servicers’ ability to meet their selling and servicing guides, under stable and adverse economic scenarios; servicers’ existing and anticipated sources of income, capital, and liquidity; adequacy of errors and omissions insurance coverage; and servicers’ financial arrangements with other parties.
  • Operational risk factors from inadequate or failed internal processes, people, and systems, or from external events.  The Enterprises are to evaluate the servicer’s current and prospective resources and capacity regarding staffing, facilities, technology, and infrastructure; key personnel, principals, and controlling shareholders, including information from background checks; and reliance on, exposure to, and ongoing monitoring and quality control of sub-servicers and other third-party service providers.
  • Legal, compliance, and reputation risk factors from operations that are inconsistent with laws/regulations or Enterprises’ servicing guides and contracts.  The Enterprises must assess servicers’ compliance programs for all applicable laws and regulations, including consumer protection laws; record of compliance, including publicly available information about supervisory and legal actions taken against the servicer, key personnel, principals, or controlling shareholders; and a pattern of consumer complaints.

Industry commentators predict that next in line on the regulators’ horizon is enhanced scrutiny into servicers’ fees and increased transparency regarding business affiliations between servicers and third-party providers to reveal any instances of self-dealing.  We will continue monitoring the FHFA’s increased oversight of the Enterprises’ relationships with mortgage servicers and its impact on the servicers.