The Financial Stability Oversight Council (FSOC) has recommended that state regulators enhance their standards and coordinate supervision of nonbank mortgage servicers and encouraged Congress to consider creating a fund to backstop nonbank servicers that fail.
The FSOC, a federal government organization chaired by the Secretary of the Treasury and tasked with identifying risks to the U.S. financial system, made the recommendations as part of its Report on Nonbank Mortgage Servicing. The report detailed the growth of the nonbank mortgage sector and pinpointed vulnerabilities that could intensify shocks to the mortgage market during times of stress. It also suggested courses of action to enhance the resilience of the sector, which originated approximately two-thirds of U.S. home loans and owned the servicing rights on 54% of the nation’s mortgage balances in 2022.
“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 Janet Yellen, U.S. Secretary of the Treasury. “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.”
Key among the vulnerabilities of nonbank mortgage companies is their concentrated exposure to mortgage-related assets, which means that heightened stress in the mortgage market can lead to simultaneous harmful impacts to their income, balance sheets and access to credit. Their liquidity, additionally, can face risk because of their obligations to make certain contractually required advances and their reliance on debt that can be repriced, decreased or even canceled during times of stress.
The FSOC noted that state regulators, which are the primary prudential regulators of nonbank mortgage servicers, have taken steps in recent years to lessen those risks, as have federal agencies. But federal entities have limited authority to impose rules and protocols on nonbanks, and regulations vary between states, making oversight across the country uneven. For example, in 2021, state regulators approved new financial and corporate governance standards for nonbanks that were aligned with standards required by Fannie Mae and Freddie Mac. But as of 2024, those standards were adopted by just nine states.
The FSOC, consequently, recommends that state regulators adopt enhanced standards in states that haven’t yet done so, along with further coordinating state supervision of nonbanks to address such fragmented oversight. Those strengthened standards could potentially include the requirement for large nonbanks to establish recovery plans, which would require proactive preparation for stress events, and resolution plans, which would strategize for “rapid and orderly resolution” in the case of material financial distress or failure.
The Council also recommended Congressional action, including the establishment of a fund financed by nonbank mortgage servicers to provide liquidity to nonbanks that are in bankruptcy or, in the FSOC’s words, “have reached the point of failure.” That fund’s aim would be to facilitate operational continuity for such companies, including loss-mitigation activities for affected borrowers and advances of investor payments, at least until servicing obligations can be transferred or the company can be recapitalized or sold. Congress should consider providing the Federal Housing Finance Agency (FHFA) and Ginnie Mae with additional authorities to better manage nonbank mortgage company counterparty risk, as well as allowing Ginnie Mae to expand its Pass-Through Assistance Program into a more effective liquidity backstop to nonbanks.
“As the report finds, current state-based requirements and limited federal authorities mean risks have not been fully addressed,” Yellen said while detailing the report’s findings to Congress last week. “We need further action to promote safe and sound operations, address liquidity risks, and promote continuity of servicing operations when a servicer cannot perform its critical functions.”
The report and its recommendations prompted a flurry of responses from industry groups, ranging from support to disapproval.
The Mortgage Bankers Association, while agreeing with the FSOC’s goals of stability and sustainability in the lending sphere and describing its recommended reforms to Ginnie Mae as “sensible,” noted that some of its recommendations are unnecessary.
“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,” said Bob Broeksmit, president and CEO of the MBA. “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.”
The Conference of State Bank Supervisors criticized the concept of a new liquidity fund mandated by Congress.
“The FSOC‘s recommendation to establish a nonbank-financed liquidity fund, administered by a newly authorized federal regulator, is premature at best,” said CSBS President and CEO Brandon Milhorn. “Before considering any such proposal, Congress should require substantially more research and analysis regarding the potentially dramatic, unintended consequences of this recommendation. I am concerned that this recommendation could negatively impact the nonbank mortgage market, particularly for low- and moderate-income borrowers, communities of color, first-time homebuyers and veterans.”
Milhorn instead urged that regulators focus their efforts on enhancing coordination between state regulators and that Congress remove legal barriers to information sharing to make coordinated regulation more possible.
