WASHINGTON — The growth of the nonbank mortgage servicing sector and the “key vulnerabilities” that can be found are the subject of the newest “Report on Nonbank Mortgage Servicing” report, which was recently released by the Financial Stability Oversight Council (FSOC).
According to FSOC, of which NCUA is a member, the report identifies strengths and weaknesses of nonbank mortgage companies.
“It 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,” Treasury said. “The report includes the Council’s recommendations to enhance the resilience of the nonbank mortgage servicing sector, drawing on existing authorities of state and federal regulators and also encouraging Congress to act to address the identified risks.”
The report was drafted by Council member agencies in coordination with the Government National Mortgage Association,” according to Treasury.
‘Risen Sharply’
According to the report, in 2022, nonbank mortgage companies (NMCs) originated approximately two-thirds of mortgages in the United States 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, the report states.
Treasury said NMCs bring certain strengths to the mortgage market, but also noted, however, that NMCs also have 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.
Strengths & Weaknesses
According to Treasury, those strengths and weaknesses include:
- 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,” Treasury said. “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,” according to the report. “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,” the report continues. “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.”
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