FSOC recommends more regulation and liquidity for nonbank servicers

A recently published report by the Financial Stability Oversight Council (FSOC) identified vulnerabilities at nonbank mortgage servicers that pose risks to financial stability. It recommended increased regulation and initiatives to improve these companies’ liquidity during moments of stress, but mortgage trade groups have different reactions to the proposals. 

The attention on nonbank mortgage companies have increased since their expansion following the financial crisis of the late 2000s. In 2022, they originated nearly two-thirds of mortgages, compared to 38% in 2008. Meanwhile, they owned servicing rights on 54% of mortgage balances in 2022, up from 4% in 2008. In addition, nonbanks represent seven of the 10 largest servicers of Fannie Mae, Freddie Mac and Ginnie Mae loans. 

The FSOC report, released on Friday, states that these companies quickly adapt their operations to market conditions, are early adopters of technology and are key for underserved borrower groups. But shocks to the mortgage market can deteriorate borrowers’ income, balance sheets and access to credit, affecting borrowers, government agencies, insurance companies and local governments. 

For example, nonbank mortgage servicers must make certain advances and their debt can be limited, repriced or even canceled in times of stress. If they need to transfer their portfolio due to a shock, it could be difficult to identify another servicer that is not impacted to take over, the report added. 

“We need further action to promote safe and sound operations, address liquidity risks, and enable continuity of servicing operations when a servicer fails,” U.S. Treasury Secretary Janet L. Yellen said in a prepared statement. 

The FSOC recommends that Congress should give the Federal Housing Finance Agency (FHFA) and Ginnie Mae additional authority to establish appropriate safety and soundness standards, directly examine counterparties, enforce compliance, and authorize Ginnie Mae and state regulators to share information, among other things. 

“Taken together, I believe these recommendations will reduce the risk of consumer harm or financial market contagion in the event of material financial stress at one or more nonbank mortgage servicers,” FHFA Director Sandra Thompson said in prepared remarks.  

But Bob Broeksmit, president and CEO of the Mortgage Bankers Association (MBA), said that some of these recommendations are “unnecessary, as layering duplicative supervision requirements or supervisory entities onto a heavily regulated market will add significant cost and complexity.”

“Managing such changes, should Congress require them, could lead to reduced appetite for mortgage servicing assets. Reducing competition and credit availability while increasing borrowing costs is antithetical to regulators’ goals of a diverse and robust market for mortgage lending and servicing,” Broeksmit said in a prepared statement. 

Broeksmit added that the report “fails to consider the adverse impacts the Basel III Endgame proposal would have on the mortgage market, which, if implemented as proposed, would push banks further out of the business and make it more difficult for them to provide the vital financing that sustains IMBs.” 

The FSOC report includes other recommendations that are focused on improving liquidity during times of stress. One is for Congress to provide Ginnie Mae with authority to expand the Pass-Through Assistance Program (PTAP) that became available during the COVID-19 pandemic. Another is for Congress to consider establishing a fund administered by a newly authorized federal regulator — and financed by servicers — to provide liquidity when they are in bankruptcy or have reached the point of failure. 

Scott Olson, executive director of the Community Home Lenders of America (CHLA), said that the trade group was “pleased” that the FSOC has embraced its call to expand PTAP, “which would create a liquidity backstop.” 

Brandon Milhorn, president and CEO of the Conference of State Bank Supervisors (CSBS), said that the recommendation to establish a fund is “premature at best.”

“Instead, federal agencies, Ginnie Mae, and Congress should focus their immediate efforts on targeted structural changes included in the FSOC report,” Milhorn said. “I encourage Congress to remove any legal impediments to information sharing between Ginnie Mae and state regulators. This common-sense reform should be taken long before Congress considers establishing a federal regulatory agency that unnecessarily duplicates existing state authority.” 

Director Rohit Chopra said the Consumer Financial Protection Bureau (CFPB) will soon propose a rule “to strengthen certain homeowner protections.” Still, it must be “accompanied by strong financial stability guardrails.” 

“We will be undertaking a rulemaking to strengthen our foreclosure protections for borrowers,” Chopra said. “The existing rules leave too many borrowers exposed to foreclosure and junk fees while they struggle to meet seemingly endless paperwork requirements. The proposed rule we are considering would shift the focus from a check-the-box compliance exercise to getting distressed homeowners in loss mitigation quickly.”