U.S. regulators call for new fund to prevent mortgage servicers from going under

By Aarthi Swaminathan

'Vulnerabilities of nonbank mortgage companies can amplify shocks in the mortgage market and undermine financial stability,' Treasury Secretary Yellen says

U.S. regulators are calling on Congress to introduce a new industry-financed fund to support mortgage-loan servicers as they weather a drought in demand due to high mortgage rates.

The multiagency?? Financial Stability Oversight Council, which is chaired by Treasury Secretary Janet Yellen, released a new report on Friday that highlights the risks associated with nonbank mortgage-loan servicers making strong gains in market share.

The FSOC was created in the wake of the 2008 financial crisis by the Dodd-Frank Act, to identify and monitor risks to the U.S. economy.

Nonbank mortgage lenders originated around two-thirds of mortgages in the U.S. in 2022, the report stated, and owned the servicing rights on 54% of mortgage balances.

These companies have increased their market share from a low in 2008, when they only originated 39% of mortgages and owned the servicing rights to just 4% of mortgage balances, the report noted.

These outstanding mortgages are guaranteed by government enterprises Fannie Mae and Freddie Mac, as well as government agency Ginnie Mae.

The fact that these mortgage servicers have made strong gains in market share means that there are "unique risks" that they face, as "their specialized business model means they are especially susceptible to macroeconomic fluctuations in the housing market, such as changes in housing prices, interest rates, and delinquency rates," Yellen said in remarks.

Home prices have hit an all-time high, according to the latest read by the Case-Shiller index. In early May, mortgage applications were down 14% from a year ago as the 30-year mortgage rate stayed above 7%, straining how much home buyers can afford.

Unlike banks and other financial institutions that can rely on deposits by consumers, nonbank mortgage companies rely on the value of mortgage-servicing rights, "which may lose value in the event of a downturn in the housing market," Yellen said. And when these mortgage servicers fail, the process of transferring servicing is an arduous process.

The bottom line is that "vulnerabilities of nonbank mortgage companies can amplify shocks in the mortgage market and undermine financial stability," Yellen added.

To that end, the FSOC made several recommendations to address such risks, including the creation of a new fund.

The council made a specific recommendation to Congress to consider legislation that would provide Ginnie Mae with the authority to expand the Pass-Through Assistance Program - which, during the coronavirus pandemic, assisted lenders who were facing a temporary liquidity shortfall - to a "more effective liquidity backstop to mortgage servicers participating in the program during periods of severe market stress."

Additionally, the FSOC encouraged Congress to create a new fund that would be financed by the nonbank mortgage-servicing sector to provide more liquidity to servicers who are in bankruptcy or have reached the point of failure, so that servicing is not disrupted.

The fund should be designed to help servicers transfer operations if they go under, the council said, and also ensure that loss-mitigation efforts are in place for borrowers who miss payments and that investors still get paid "until servicing obligations can be transferred in an orderly fashion or the company has been recapitalized by investors or sold."

The legislation also "should outline the scope and objectives of the fund, which include avoiding taxpayer-funded bailouts," the report added.

-Aarthi Swaminathan

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05-11-24 0842ET

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