Report cites vulnerabilities in non-bank mortgage servicing sector, including financial stability risk; offers recommendations

Key vulnerabilities that may impair nonbank mortgage servicers’ ability to carry out critical functions, and could amplify shocks to the mortgage market leading borrowers to miss payments and cause losses to secondary market giants, are outlined in a report issued late last week by federal financial institution regulators.

The Financial Stability Oversight Council (FSOC), in its Friday-issued Report on Nonbank Mortgage Servicing, also suggested that the vulnerabilities posed by the nonbank mortgage companies (NMCs) risk financial stability.

According to the report, in 2022 NMCs originated approximately two-thirds of mortgages nationwide and owned the servicing rights on 54% of mortgage balances. The report states that NMC market share has “risen significantly” since its low of 39% of mortgages and ownership of only 4% of the servicing rights on mortgage balances. Nonbank mortgage servicers are 7 of the 10 largest servicers for Fannie Mae, Freddie Mac, and Ginnie Mae, the report states.

“NMCs’ concentrated exposure to mortgage-related assets means that stress in the mortgage market can lead to adverse effects on their income, balance sheets, and access to credit simultaneously,” the report states in describing vulnerabilities. “NMCs’ obligations to make certain contractually required advances, as well as their reliance on debt that can be repriced, reduced, or canceled in times of stress, can lead to significant liquidity risk, which is exacerbated by high leverage carried by some NMCs. Finally, vulnerabilities are similar across NMCs, so certain macroeconomic scenarios may lead to stress across the entire sector.”

The report contends that since NMCs have similar business models and share financing sources and subservicing providers, “distress in the NMC sector may be widespread during times of strain.”

“Financial distress at NMCs that is sufficiently severe and widespread could lead to a reduction in servicing capacity and in the availability of mortgage credit,” the report states. “Large servicing portfolios cannot be transferred quickly because the transfer process is inherently resource-intensive and complicated. In addition, it might be difficult to identify another servicer to take over the portfolio, in part because the similarity of NMC business models means that other NMCs may be facing the same stresses at the same time.”

The report makes several recommendations for addressing the vulnerabilities, including:

  • Encourages state regulators, as the primary prudential regulators of nonbank mortgage servicers, to enhance prudential requirements as appropriate, adopt enhanced standards in states that have not yet done so, and further coordinate supervision of nonbank mortgage servicers. “State regulators should require recovery and resolution planning by large nonbank mortgage servicers to enhance the financial and operational resilience of the nonbank mortgage sector,” the report states.
  • Recommends Congress consider legislation to give Ginnie Mae (the Government National Mortgage Association) authority to expand the “Pass-Through Assistance Program” (PTAP) “into a more effective liquidity backstop to mortgage servicers participating in the program during periods of severe market stress.” The PTAP is based on fixed-income securities that represent an undivided interest in a pool of federally insured mortgages, as assembled by Ginnie Mae.
  • Suggests Congress consider establishing a fund financed by the nonbank mortgage servicing sector to provide liquidity to nonbank mortgage servicers that are in bankruptcy or have reached the point of failure. “The fund should be designed to facilitate operational continuity of servicing, including loss-mitigation activities for borrowers and advancement of monthly payments to investors, until servicing obligations can be transferred in an orderly fashion or the company has been recapitalized by investors or sold.” FSOC said. Additionally, the group said the legislation should outline the scope and objectives of the fund, which include avoiding taxpayer-funded bailouts. “The legislation should also provide sufficient authorities to an existing federal agency to implement and maintain the fund, assess appropriate fees, set criteria for making disbursements, and mitigate risks associated with the implementation of the fund.

The Financial Stability Oversight Council Releases Report on Nonbank Mortgage Servicing

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