In a recent meeting of the Financial Stability Oversight Council, Secretary of the Treasury Janet L. Yellen highlighted the importance of addressing risks associated with nonbank mortgage servicing. The Council is set to vote on publishing a report that provides a comprehensive analysis of these risks and offers concrete recommendations for mitigating them.
Nonbank mortgage companies play an integral role in the mortgage market, ensuring accurate and timely payments to investors while also providing appropriate loss-mitigation options for borrowers. Over the past decade, this sector has grown significantly in importance. As of 2023, nonbanks collectively originated and serviced the majority of U.S. residential mortgages, a substantial increase from 2008.
However, despite their critical function and certain strengths such as greater efficiency due to technology adoption, nonbank mortgage companies also present unique risks. Their specialized business model makes them particularly susceptible to macroeconomic fluctuations in the housing market, including changes in housing prices, interest rates, and delinquency rates. They are more reliant than depository institutions on the value of mortgage servicing rights which may lose value during a downturn in the housing market.
The report indicates that if a nonbank mortgage company fails, it could disrupt economic activity and financial services provision. This is because it may be difficult for such a company to find funding to continue critical servicing operations or provide adequate loss mitigation for distressed borrowers.
The Council’s analysis suggests that further action is needed to promote safe operations, address liquidity risks, and ensure continuity of servicing operations when a servicer cannot perform its critical functions. Recommendations include strengthening prudential standards by state regulators and requiring resolution and recovery planning by large nonbank mortgage servicers.
Congressional action is also recommended by the Council. This includes considering legislation that authorizes and protects confidential information sharing among Council member agencies, state regulators, and Ginnie Mae; providing FHFA and Ginnie Mae with additional authorities to better manage nonbank mortgage company counterparty risk; and establishing a fund financed by the industry to provide liquidity to failing nonbank mortgage servicers.
Secretary Yellen emphasized the importance of these recommendations in protecting borrowers and preventing disruptions to economic activity. She commended the Council for its important and timely work on this issue.
