FHFA Watchdog Voices Concerns over Non-Bank Servicers

As scrutiny continues to grow in the servicing arena, the watchdog for the Federal Housing Finance Agency (FHFA) says it has concerns about non-bank servicers working with GSE loans.

In a report released Tuesday, the Office of the Inspector General (OIG) for FHFA outlined its concerns over the growth of companies like Ocwen and Nationstar, who have ratcheted up their presence in the special servicing segment as banks, burdened by capital requirements, look to unload some of their mortgage servicing rights (MSR) portfolios.

Out of the 30 largest servicers, FHFA OIG says that non-banks held a 17 percent share of mortgage market as of the end of 2013, representing nearly $1.7 trillion. As a result, the report says these non-bank companies may have taken on more volume than they can handle.

"The rise in nonbank special servicers has been accompanied by consumer complaints, lawsuits, and other regulatory actions as the servicers' workload outstrips their processing capacity," the report said.

FHFA OIG also expressed doubt as to whether non-banks operating without the same guidelines as traditional servicers would be able to weather an economic downturn as their stock of largely non-performing and at-risk loans worsens.

In addition, OIG expressed concerns about the practice of non-banks using short-term financing to buy MSRs for loans that may only pay out after time, saying, "This practice can jeopardize the companies' operations and also the Enterprises' timely payment guarantees and reputation for loans they back."

While concluding that FHFA and the GSEs—who approve transfers of their loans to non-bank special servicers—have "responded well to specific problems," OIG recommended that the agency establish a framework for oversight to handle general non-bank risks and issue guidance on a risk management process.

In a response, FHFA agreed with the inspector's suggestions, pledging to develop a guidance on risk management by December 1.

OIG isn't the first regulator to warn of potential problems at non-bank servicers. Earlier this year, Benjamin Lawsky, superintendent of New York's Department of Financial Services, set his sights on Ocwen and later Nationstar, requesting information about their growth, practices, and treatment of consumers. The two companies are among the biggest non-banks in the servicing field, putting a focus on non-performing loans.

Lawsky also revealed in May that his department plans to dig into the relationships some special servicers have with their affiliates, alleging "affiliated companies have every incentive to provide low-quality services for high fees, and they appear in some cases to be doing so."

Both Ocwen and Nationstar have pledged to work with Lawsky's office to resolve any concerns.