Today is the deadline when the Federal Housing Finance Agency (FHFA) is scheduled to unveil its risk management guidance intended to curb financial and operational risks associated with loan servicing by nonbank entities.

The backdrop for FHFA’s initiative is the fact that the nation’s three largest nonbank mortgage servicers have tripled in size since 2012, and approximately 15% of U.S. home loans are handled by nonbank servicers, with an expected increase in this share in the near future.  The increase in size of the nonbank loan servicers is largely due to Fannie Mae’s and Freddie Mac’s sale of troubled loan portfolios in bulk to such servicers that specialize in handling distressed loans.  While the Consumer Financial Protection Bureau regulates some of the aspects of the nonbank loan servicers’ operations, FHFA has concluded that liquidity and operational risks posed by the nonbank loan servicers are not sufficiently addressed.  These risks include:

  • Using short-term financing to buy servicing rights for troubled mortgage loans that may only begin to pay out after long-term work to resolve their difficulties.  This practice can jeopardize the nonbank servicers’ operations and also Fannie Mae’s and Freddie Mac’s timely payment guarantees and reputation for loans they back; and
  • Assuming responsibilities for servicing large volumes of mortgage loans that may be beyond what the servicers’ infrastructures can handle.  A sharp rise in nonbank special servicers has been accompanied by consumer complaints, lawsuits, and other regulatory actions as the servicers’ workload outstrips their processing capacity.

To address these risks, today the FHFA is scheduled to issue risk-management supervisory guidance that will set forth FHFA’s expectations for the policies and procedures that Fannie Mae and Freddie Mac should use to manage liquidity and operational risks of the nonbank servicers.  FHFA will also carefully supervise Fannie Mae’s and Freddie Mac’s implementation of these policies.

We will keep monitoring FHFA’s initiative and provide an update once FHFA issues its nonbank servicers’ supervisory guidance.