FSOC Puts Mortgage Servicing Trends Under the Microscope

The Financial Stability Oversight Council (FSOC) has announced the release of its “Report on Nonbank Mortgage Servicing 2024,” documenting the growth of the nonbank mortgage servicing sector and the critical roles that nonbank mortgage servicers play in the mortgage market.

The Report 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, and includes the FSOC’s recommendations to enhance the resilience of the nonbank mortgage servicing sector, drawing on existing authorities of state and federal regulators, and encouraging Congress to act to address the identified risks. The Report was drafted by FSOC member agencies in coordination with 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,” said Secretary of the Treasury Janet L. Yellen. “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.”

According to the FSOC, in 2022, nonbank mortgage companies (NMCs) originated approximately two-thirds of mortgages in the U.S., and owned the servicing rights on 54% of mortgage balances. NMC market share has risen significantly since its low in 2008, when NMCs originated 39% of mortgages, and owned the servicing rights on only 4% of mortgage balances. Nonbank mortgage servicers are seven of the 10 largest servicers for Fannie Mae, Freddie Mac, and Ginnie Mae.

Servicers’ benefit to the mortgage market

“MBA agrees with the report’s analysis of the critically important role independent mortgage banks (IMBs) play in the mortgage market: lending to, and servicing loans for, a majority of first-time and low- and moderate-income homebuyers,” said Robert D. Broeksmit, CMB, President and CEO of the Mortgage Bankers Association (MBA). “The report identifies sensible opportunities for structural reform to the Ginnie Mae program while highlighting Ginnie Mae’s ongoing effort to expand liquidity options and relieve liquidity pressure on issuers. These efforts would make Ginnie Mae and government loan servicing more efficient, reduce liquidity pressure, and ultimately reduce costs for Federal Housing Administration (FHA), Veterans Affairs, and Rural Housing borrowers.”

The FSOC in its Report states that NMCs bring certain strengths to the mortgage market, however there are 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.

Monitoring servicing risk

“The growth of nonbank mortgage servicers over the past decade has shifted market dynamics and highlighted the need for increased collaboration and coordination among regulators,” said Federal Housing Finance Agency (FHFA) Director Sandra L. Thompson. “The FSOC Report calls attention to the strengths of nonbank mortgage servicers, including their commitment to the mortgage market and to supporting sustainable homeownership for historically underserved populations, along with several structural vulnerabilities. These vulnerabilities include liquidity risk, leverage, asset concentration, and operational risk, each of which could amplify and transmit mortgage market shocks to other financial market participants and to consumers.”

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 FSOC 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 FSOC has made several recommendations to address the risks posed by nonbank mortgage servicers identified in the Report, including:

  • Promoting safe and sound operations: The FSOC 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 FSOC also encourages Congress to provide the 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 FSOC 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 FSOC recommends that Congress consider legislation to provide Ginnie Mae with authority to expand the Pass-Through Assistance Program (PTAP) into a more effective liquidity backstop to mortgage servicers participating in the program during periods of severe market stress. In addition, the FSOC supports the U.S. 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 FSOC encourages that Congress 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 FSOC’s Report.

“We at Ginnie Mae have been raising this source of concern for over a decade. We have spent just as long deploying our existing authorities to develop a suite of risk management and oversight tools to manage these risks, but we need new authorities to address these issues in a holistic manner. This is why it is so important that we have a public conversation about these risks,” said Ginnie Mae Acting President Sam Valverde. “This Report represents months of work and introduces a number of recommendations for how state and federal agencies can strengthen the housing finance system and address these persisting challenges. We look forward to our continued work with the Council on these pressing matters and stand ready to provide technical assistance on any related legislative approaches. I am confident that, working across the public sector, we can drive meaningful change in a way that supports sustainable access to credit while protecting the financial system and consumers from harm.”

Ranking the top bank and nonbank servicers

According to the FSOC’s report, 14 of the top mortgage servicers (as of Q4 2023), ranked by servicing unpaid principal balance (UPB), were nonbank servicers. In total, the top 20 agency servicers hold the servicing rights on nearly $6.3 trillion in unpaid balances on mortgages in agency pools, approximately 70% of the total agency market. Nonbank mortgage servicers in the top 20 hold the servicing rights on $4.3 trillion, or almost half, of the total agency market.

The top 20 as reported by the FSOC was led by nonbank servicer Lakeview/Bayview Loan Servicing, reporting $644.5 billion in UPB. Lakeview was followed by bank servicer Chase Home Finance Bank, reporting $597.0 billion in UPB, and coming in at third was nonbank servicer PennyMac Corporation, reporting $588.5 billion in UPB.

Rounding out the top 10 were:

  • Wells Fargo (Bank) with $539.9 billion in UPB
  • Mr. Cooper Group (Nonbank) with $531.7 in UPB
  • New Rez/Caliber Home Loans (Rithm) (Nonbank) with $474.1 billion in UPB
  • Rocket Mortgage (Nonbank) with $463.6 in UPB
  • Freedom Mortgage Corporation (Nonbank) with $456.7 in UPB
  • United Wholesale Mortgage (UWM) (Nonbank) with $274.4 in UPB
  • U.S. Bank (Bank) with $220 billion in UPB
  • Matrix Financial Services/Two Harbors (Nonbank) with $213.2 billion in UPB
  • Truist Bank with $210.6 billion in UPB
  • PNC Bank (Bank) with $202.5 billion in UPB
  • Ocwen Financial/PHH Mortgage (Nonbank) with $163.0 billion in UPB
  • Onslow Bay Financial (Nonbank) with $150.3 billion in UPB
  • LoanDepot.com LLC (Nonbank) with $134.0 billion in UPB
  • Carrington Mortgage Services LLC (Nonbank) with $126.6 billion in UPB
  • Fifth Third Bank (Bank) with $97.6 billion in UPB
  • Citizens Bank (Bank) with $96.3 billion in UPB
  • CMG Mortgage Inc. (Nonbank) with $92.6 billion in UPB

“We share FSOC’s goals of a safe, stable, and sustainable financial services marketplace, but some of the report’s recommendations are unnecessary,” added Broeksmit. “Years of punitive regulatory capital treatment have already limited the willingness and ability of depository institutions to participate in the mortgage lending and servicing markets. While we support national standards for capital and liquidity requirements, 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.”

Of the top 10 residential mortgage subservicers, based on Q4 2023 totals, just three were bank servicers, as opposed to the rest as nonbank servicers, led by Cenlar (Bank) with a reported $875.0 billion in UPB. Cenlar was followed by nonbank servicers Dovenmuehle with $515.0, billion in UPB and Mr. Cooper at third with $403.8 billion in UPB. Rounding out the top 10 were:

  • LoanCare (Nonbank) with $320.0 billion in UPB
  • Flagstar (Bank) with $294.9 billion in UPB
  • ServiceMac (Nonbank) with $245.2 billion in UPB
  • Ocwen Financial/PHH Mortgage (Nonbank) with $139.9 billion in UPB
  • Select Portfolio Servicing (Nonbank) with $133.0 billion in UPB
  • M&T Bank (Bank) with $115.1 billion in UPB
  • New Rez/Caliber/Shellpoint (Nonbank) with $102.5 billion in UPB

Click here to view the FSOC’s “Report on Nonbank Mortgage Servicing 2024.”

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Eric C. Peck

Eric C. Peck has 25-plus years’ experience covering the mortgage industry, most recently serving as Editor-in-Chief for National Mortgage Professional Magazine. He graduated from the New York Institute of Technology, where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books, and has served as Copy Editor for Entrepreneur.com.
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