Earlier this month, the Office of the Inspector General issued a report on the audit of the FHFAs control over nonbank special mortgage servicers.[1] The Agency has not established a process to handle risks resulting from the growing participation of these market players. Today more than ever, the Fannie Mae and Freddie MAc rely on non bank servicer to reduce and service their loans. However, the growth of this service providers has been accompanied by growing consumer complaints, lawsuits and other problems. Furthermore, non bank servicers appear to rely on short term financing for the acquisition of non-performing loans, but the restructuring and payout of these loans exceeds the due date of this financing. These are hazardous situations that could significantly impact the mortgage and housing market.

NON-BANK MORTGAGE SERVICERS

Mortgage servicers are companies that perform services in connection with mortgages and mortgage backed securities. These may be part of the originator company, or have acquired the servicing rights from the lender. The Government Sponsored Enterprises have increased their reliance on these type of companies to collect payments, manage escrow accounts, and handle mortgage modifications, defaults and foreclosures. Today, 9 of Fannie Mae;s top 20 servicers are non banks, and they account for 28% of the overall groups loan volume, and 7 out of Freddie Macs top 20 servicers, same type, account 15% of the groups loan volume. In other words, non bank servicers play a significant role in the mortgage industry and the housing market at large.[2]

SPECIALTY SERVICERS

These type of servicers specialized in acquiring troubled loans. Servicing of delinquency and default loans is labor intensive because the servicer may need to contact the borrower and assess their financial situation. Furthermore, the company may need educate the troubled borrower about the long term costs of defaulting in the mortgage, available options to avoid losing the property, and possibly it will initiate foreclosure proceedings.

These service had shown a dramatic growth, and today hold servicing right over 14% of the 10 trillion market. yet, these are exempt from the stringent regulatory and financial requirements demanded from banks.

THE EVALUATION

• In order to approve transfers to a servicer, the Enterprises evaluate:
• overall servicing performance
• capacity to service the number and types of mortgage loans to be transferred
• delinquent ratios
• status of unresolved issues related to repurchase requests, claim details, or other outstanding claims
• and financial condition

When the portfolio exceeds 25,000 loans, the FHFA must give the final approval for the transfer.

THE HAZARD

The problem with the significant role non-bank speciality servicers play today, is their aggressive growth against their risky financial behavior and poor operational performance.

Some servicers rely in short term financing for the acquisition of non-performing loans. This poses the risk that their debt may be due before they get cash flow from troublesome loans. We must remember they hold servicing rights over 1.4 trillion of debt.

The other problem is the lack of infrastructure to properly handle the transfer and handling of the troubled mortgages. This became evident in the last year, after the Consumer Financial Bureau, CFPB, and New Yorks Financial Regulator Benjamin Lawsky responded to hundreds of consumers who complained of lost paperwork, unexplained fees and unfair foreclosures stemming from transfers to non bank specialty servicers.

ONE STEP FORWARD

Federal and State agencies have interfered with the explosive growth of these servicers.

THE RECOMMENDATION

The Office of the Inspector General concluded that FHFA can help mitigate the risks stemming from this situation, and recommended the agency:

1. issued guidance on risk management processes for nonbank special servicers
2. develop a comprehensive oversight framework to examine and mitigate the risks these servicers pose

ANOTHER STEP FORWARD

In a recently issued bulletin, the FHFA required the GSEs to consider servicer capacity, including staffing, facilities, information technology systems, and any sub-servicing arrangements, as part of the evaluation of a servicer and transfers.

HUD, Fannie Mae and Freddie Mac have required us to engage in risk mitigation actions. I think it is only fair that non bank servicers are required to cooperate so that the housing market continues to recover. Afterall, it is kind of paradoxical that they engage in risky financing as they help the Federal Government with their troubled loans.

1) http://www.infobytesblog.com/fhfa-oig-concerned-about-specialty-servicers-highlights-fhfa-servicing-transfer-guidance/

2) http://origin.www.fhfaoig.gov/Content/Files/AUD-2014-014.pdf

3) http://www.consumerfinance.gov/newsroom/cfpb-state-authorities-order-ocwen-to-provide-2-billion-in-relief-to-homeowners-for-servicing-wrongs/

4) http://www.reuters.com/article/2014/02/12/us-mortgages-newyork-idUSBREA1B1PG20140212

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