Ginnie Mae and the Rise of Nonbank Specialty Servicers

Ginnie Mae and the Rise of Nonbank Specialty Servicers

Over the past few years, nonbank specialty servicers have assumed a larger share of the mortgage market.

The actions of mortgage servicers can significantly affect whether borrowers can repay their mortgages. Mortgage servicers manage home loans after the loan is originated. If all goes smoothly, the servicer simply accepts and processes on-time payments from the borrower. If the borrower has trouble making payments, the servicer must interact more directly with the borrower. Effective servicing can potentially help borrowers avoid foreclosure. On the other hand, irresponsible servicing practices can put homeowners at serious risk. In 2012, the U.S. Department of Justice reached a $25 billion settlement with the nation’s five largest mortgage servicers to address abuses such as robo-signing.

Over the past few years, the $10 trillion mortgage servicing industry has changed as nonbank specialty servicers assume a much larger share of the market. Nonbank specialty servicers have purchased rights to service hundreds of billions of dollars of loans, often from chartered banks that originated or aggregated the loans in the first place. Nonbank institutions include a diverse array of companies that facilitate financial services, such as hedge funds, that are not regulated as or organized like banks.

By the end of 2013, nonbank servicers handled 17 percent of the mortgage market, compared to 6 percent in 2011. At Ginnie Mae, which guarantees the mortgage-backed securities containing virtually all FHA loans, nonbank servicers handle 64 percent of the servicing for the newly produced loans in its recent pools.

The impact of this shift in servicing responsibilities remains unclear, though regulators have begun developing standards for nonbank servicers. For example, in October 2014, Ginnie Mae announced new program eligibility standards to cover the range of different institutions in its program. And in January 2015 Federal Housing Finance Agency (FHFA) unveiled financial requirements for nonbank lenders that originate and service mortgages purchased by Fannie Mae and Freddie Mac. Additional requirements are forthcoming.

Explaining the Shift in Servicers

Traditionally, banks have serviced the loans they originate. Today, though, the rights to service a mortgage are commonly bought and sold: the lender and servicer are often not the same company. Mortgage servicing can be a lucrative business, particularly at scale. Mortgage servicers are paid fees proportionate to the unpaid balance on the loans they service. According to Investor’s Business Daily, a standard servicing fee is 25 cents per $100 of unpaid loan balance, or $250 per year for a $100,000 outstanding loan. Servicers also often receive additional payments for loans that require more oversight or interaction with the borrower, such as adjustable-rate mortgages or loans to borrowers who have trouble making their payments.

Banks have sold their servicing rights for a number of reasons. Recent changes in financial regulation have provided banks with financial incentives to sell their servicing rights. In 2013, the United States adopted the international Basel III capital standards for banks. These standards were designed to strengthen the financial system and reduce risks. However, the standards also increased the capital levels for banks to service mortgages. Moreover, during the crisis, banks struggled to service troubled loans. In response, regulators encouraged banks to sell their servicing rights. In turn, nonbank institutions—who did not face the same regulatory requirements as banks— stepped in to purchase the servicing rights.

Concerns with Nonbank Servicing

Regulators have expressed serious concern about the role of nonbank mortgage servicers and their rapid growth. Benjamin Lawsky, until recently New York’s Superintendent of Financial Servicing, commented last year, “[W]e have serious concerns that some of these non-bank mortgage servicers are getting too big, too fast...For some firms, we have concerns about their capacity to handle their current servicing load without violating the law or homeowners’ rights.” In the past, FHFA has commented that nonbank servicers’ business practices may put Fannie Mae and Freddie Mac at risk. There is also evidence that homeowners have suffered from glitches that occurred following transfers of servicing rights.

Nonbanks’ affiliation with related companies, such as foreclosure firms, might also present a conflict of interest. For example, Lawsky has criticized Ocwen’s relationship with force-placed insurance company Altisource Portfolio Solutions, which provides home insurance to borrowers whose coverage has lapsed. Perhaps in response, in November 2014, Altisource announced it was discontinuing its force-placed insurance business. It is critical to ensure that the interests of borrower and servicer are aligned to minimize the risk of foreclosure, and that the servicer does not have a financial incentive to foreclose.

Nonbank servicers often deal with distressed loans that require active management. Accordingly, it is difficult to assess whether concerns about nontbank servicers reflect the distressed borrowers they serve or the servicers’ business practices. In fact, the Urban Institute comments that nonbank servicers “may actually provide better service to delinquent borrowers given the difficult loans they tend to service.”

Regulatory Response and What Lies Ahead

Regulators have begun to respond to this new paradigm for mortgage servicing. In 2012, the Financial Stability Oversight Council published a final rule to increase oversight of nonbank financial companies. In January 2014, the Consumer Financial Protection Bureau implemented new rules designed to protect consumers when companies transfer mortgage servicing rights for their loans. In February 2014, the New York Department of Financial Services blocked nonbank servicer Ocwen from buying servicing rights on $39 billion of loans from Wells Fargo. In November, Wells Fargo and Ocwen canceled the deal. This action followed a 2013 court order requiring Ocwen to provide over $2 billion in compensation for deceptive practices.

Regulators have hinted at more action to come. In early 2014, Representative Maxine Waters sent a letter to regulators asking them to take a closer look at nonbank specialty servicing. In October, Senator Elizabeth Warren and Representative Elijah Cummings asked the Government Accountability Office to study the potential risks nonbank servicers may pose to consumers. In October 2014, the Conference of State Bank Supervisors formed a task force to develop policy options for regulating non-bank mortgage servicers. Ginnie Mae continues to consider new rules for all servicers, bank or nonbank. The rules would aim to improve servicers’ liquidity, but not drive down the value of the servicing rights. As Ginnie Mae President Ted Tozer commented, “Everybody should have an equal shot at our program. All we’re looking at is risk.” Tozer has frequently noted that since the financial crisis, nonbank funding and support for mortgage origination and servicing has made mortgages available to meet borrowers’ demand.

The jury is out on whether nonbank specialty servicers have a better or worse performance record than bank servicers. And much will likely be revealed by the passage of time. However, as the Urban Institute points out, differences between individual servicers might matter more than whether the servicer is a bank or nonbank. Banks do not always perform better: after all, the five parties in the $25 billion 2012 mortgage servicing settlement were all banks.