WASHINGTON — The Financial Stability Oversight Council (Council) today released its Report on Nonbank Mortgage Servicing. The report documents the growth of the nonbank mortgage servicing sector and the critical roles that nonbank mortgage servicers play in the mortgage market. It identifies certain key vulnerabilities that can impair servicers’ ability to carry out these critical functions and describes how these vulnerabilities could amplify shocks to the mortgage market and pose risks to financial stability. The report includes the Council’s recommendations to enhance the resilience of the nonbank mortgage servicing sector, drawing on existing authorities of state and federal regulators and also encouraging Congress to act to address the identified risks. The report was drafted by Council member agencies in coordination with the Government National Mortgage Association (Ginnie Mae).
“The nonbank mortgage servicing sector plays an important role in our economy, and the Council has produced a comprehensive analysis of risks in the sector and is making concrete recommendations to protect U.S. financial stability,” Secretary of the Treasury Janet L. Yellen said. “We need further action to promote safe and sound operations, address liquidity risks, and enable continuity of servicing operations when a servicer fails. Moving the Council’s recommendations forward is crucial to protecting borrowers and preventing disruptions to economic activity.”
In 2022, nonbank mortgage companies (NMCs) originated approximately two-thirds of mortgages in the United States and owned the servicing rights on 54 percent of mortgage balances. NMC market share has risen significantly since its low in 2008, when NMCs originated 39 percent of mortgages and owned the servicing rights on only 4 percent of mortgage balances. Nonbank mortgage servicers are 7 of the 10 largest servicers for Fannie Mae, Freddie Mac, and Ginnie Mae.
NMCs bring certain strengths to the mortgage market. However, NMCs also have vulnerabilities, and in a stress scenario, NMCs’ vulnerabilities could cause NMCs to amplify and transmit the effect of a shock to the mortgage market and broader financial system.
- NMC strengths: NMCs are significant mortgage originators and servicers for groups that have historically been underserved by the mortgage market. Some NMCs have also developed technology platforms that enable them to originate mortgages more quickly than their competitors, and others have expanded into specialty default servicing for nonperforming loans and loss mitigation.
- NMC vulnerabilities: 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. 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.
- Transmission channels: When these vulnerabilities compromise NMCs’ ability to carry out their critical functions, borrowers may suffer from disruptions in the servicing of their mortgages, and Fannie Mae, Freddie Mac, and Ginnie Mae may experience sizeable losses. 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. 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.
State regulators and federal agencies have taken steps in recent years to mitigate the risks posed by the rising share of mortgages serviced by NMCs, but the combination of various state requirements and limited federal authorities to impose additional requirements do not adequately and holistically address the risks described in the Council’s report. Stress in the sector could harm mortgage borrowers and, more broadly, disrupt the provision of financial services and impair the ability of the financial system to support economic activity. The Council is making several recommendations to address the risks posed by nonbank mortgage servicers identified in the report.
- Promoting safe and sound operations: The Council encourages state regulators, as the primary prudential regulators of nonbank mortgage servicers, to enhance prudential requirements as appropriate, adopt enhanced standards in those 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 Council also encourages Congress to provide the Federal Housing Finance Agency (FHFA) and Ginnie Mae with additional authorities to better manage the risks of NMC counterparties to Fannie Mae and Freddie Mac and to Ginnie Mae, respectively. Congress should consider providing FHFA and Ginnie Mae with additional authority to establish appropriate safety and soundness standards and to directly examine nonbank mortgage servicer counterparties for, and enforce compliance with, such standards. To facilitate coordination, the Council recommends Congress consider authorizing Ginnie Mae and encouraging state regulators to share information with each other and with Council member agencies, as appropriate.
- Addressing liquidity pressures in the event of stress: The Council recommends that Congress consider legislation to provide Ginnie Mae with authority to expand the Pass-Through Assistance Program into a more effective liquidity backstop to mortgage servicers participating in the program during periods of severe market stress. In addition, the Council supports the Department of Housing and Urban Development’s ongoing administrative work to relieve liquidity pressures for Ginnie Mae issuers as well as Ginnie Mae’s ongoing efforts to explore ways to facilitate financing for relieving liquidity pressures for solvent issuers. Federal agencies should further explore and evaluate how existing policy tools and authorities could be further leveraged to reduce liquidity pressures from servicing advance obligations in times of stress.
- Ensuring continuity of servicing operations: The Council encourages Congress to 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. 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 establishment of such a fund should be accompanied by the additional regulatory authorities and consumer protections recommended in the Council’s report.
The Council will continue to monitor the evolution of the risks identified in the report and may take or recommend additional actions to mitigate such risks in accordance with the Analytic Framework for Financial Stability Risk Identification, Assessment, and Response that the Council adopted in November 2023, if needed.
The full report can be viewed here.
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