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Next Steps in Nonbank Mortgage Servicing Oversight

ApplicationA new report published by the Urban Institute’s Housing Finance Policy Center calling for a re-examination of how federal regulators oversee nonbank mortgage servicers.

The report, titled “Improving the Safety and Soundness of Nonbank Mortgage Servicers Will Require More Than Prudential Regulation,” examined recommendations made in October by the Conference of State Bank Supervisors (CSBS), which proposed new prudential regulatory standards. The CSBS report advocated for a stronger role by state regulators over this sector.

The Urban Institute report challenged the CSBS’s emphasis on the states, questioning if it would increase redundancies and inconsistencies in the regulatory environment.

“Nonbank regulation should be structured in a manner that not only keeps the system safe and sound but maximizes efficiency by eliminating redundancy and inconsistency,” stated the report, authored by Housing Finance Policy Center VP Laurie Goodman and Senior Research Associate Karan Kaul. “A fragmented regulatory regime that includes the federal government, states, Fannie Mae, Freddie Mac, and Ginnie Mae is not conducive the achieving those outcomes. Additionally, given that the CSBS’s proposed capital and liquidity requirements are modeled after Federal Housing Finance Agency (FHFA) requirements, it is unclear how applying the same standards at the state level would improve safety materially.”

The report pointed out that Fannie Mae, Freddie Mac, and Ginnie Mae already have a “pseudo-regulatory” infrastructure that oversees nonbank servicers, while the servicers are mandated to provide data to the agencies on all levels of loan activity along with quarterly reports detailing their financial health.

“This close engagement is much more effective than simply setting minimum capital and liquidity standards because it allows the agencies to identify problems early and take corrective action,” the report said.

The report also raised the question of whether the CSBS proposal offered a solution that was not attached to a pressing problem, remarking that nonbanks sell almost all of their production to the federal agencies and, as a result, do not burden themselves with credit risk.

“The real risk they face is the timing delay between the payment of delinquent principal, interest, taxes, and insurance to relevant parties and the reimbursement of those advances by the GSEs and the FHA,” the report continued. “The GSEs reimburse after loans become four months delinquent, but the FHA does not do so until the loan is resolved through a short sale or foreclosure, a process that can take years. If there is a large increase in delinquencies that forces nonbanks to temporarily advance more cash than they had anticipated, the result can be a liquidity crunch.”

The report proposed that the “most effective way to prevent future liquidity crises in the nonbank servicer sector” was to expand Federal Home Loan Bank (FHLB) membership to nonbanks, thus giving them access to emergency federal assistance that is available to bank depositories.

“Paired with prudential regulation at the federal level, FHLB membership would give nonbanks much-needed access to stable federal funds through the cycle and significantly mitigate the perpetual liquidity risks the sector faces,” the report said.

About Author: Phil Hall

Phil Hall is a former United Nations-based reporter for Fairchild Broadcast News, the author of nine books, the host of the award-winning SoundCloud podcast "The Online Movie Show," co-host of the award-winning WAPJ-FM talk show "Nutmeg Chatter" and a writer with credits in The New York Times, New York Daily News, Hartford Courant, Wired, The Hill's Congress Blog and Profit Confidential. His real estate finance writing has been published in the ABA Banking Journal, Secondary Marketing Executive, Servicing Management, MortgageOrb, Progress in Lending, National Mortgage Professional, Mortgage Professional America, Canadian Mortgage Professional, Mortgage Professional News, Mortgage Broker News and HousingWire.
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