FSOC suggests so…
The Financial Stability Oversight Council (FSOC or council) has issued a report highlighting potential risks to the financial system arising from the vulnerabilities of nonbank mortgage servicers.
The report found that nonbank mortgage companies (NMCs), which now originate around two-thirds (54%) of US mortgages and service over half of outstanding mortgage balances, have critical vulnerabilities that could impair their ability to function properly.
“As indicated by their large market share, NMCs perform critical functions for the mortgage market through their operational capacity in loan origination and servicing. Although some NMCs specialize only in origination or servicing, larger NMCs tend to focus on both,” The FSOC wrote in the report. “The council’s primary concern for this report is the ability of NMCs to carry out critical mortgage servicing responsibilities in times of stress.”
However, the council warned that because NMCs rely heavily on mortgage-related business, “shocks to the mortgage market can lead to significant deterioration in NMC income, balance sheets, and access to credit simultaneously.”
Other key vulnerabilities cited include NMCs’ heavy use of potentially cancellable financing, significant operational risks inherent to mortgage servicing, and concentration risks since they share many funding sources and subservicers.
“If these vulnerabilities result in NMCs being unable to carry out their critical functions at times of market stress, borrowers could experience disruption and harm, the agencies (Fannie Mae, Freddie Mac, and Ginnie Mae) and other credit guarantors could experience large losses, and there could be payment delays to stakeholders,” the report cautioned.
While regulators have taken some steps to mitigate NMC risks, the FSOC urged Congress to promote greater mortgage market stability by more directly addressing the identified issues.
The Mortgage Bankers Association agreed with analyzing NMCs’ crucial role but opposed adding “duplicative supervision requirements” that could reduce competition.
“We share FSOC’s goals of a safe, stable, and sustainable financial services marketplace, but some of the report’s recommendations are unnecessary,” MBA president and CEO Bob Broeksmit said in a statement. “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.
“While we support national standards for capital and liquidity requirements, layering duplicative supervision requirements or supervisory entities on to a heavily regulated market will add significant cost and complexity. Managing such changes, should Congress require them, could lead to a 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.
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“The report fails to consider the adverse impacts the Basel III Endgame proposal would have on the mortgage market, which, if implemented as proposed, would push banks further out of business and make it more difficult for them to provide the vital financing that sustains IMBs.”
Acting Comptroller of the Currency Michael Hsu voiced support for the report and its recommendations, emphasizing the importance of addressing the identified financial stability issues.
“Mortgage servicing risks touch the homes and bank accounts of many Americans,” Hsu said. “The report identifies important financial stability issues that need to be addressed. I look forward to working with all stakeholders on addressing these recommendations which will strengthen and improve the resilience of the financial system.”
The FSOC said it will continue monitoring NMC risks and may take or recommend further mitigating actions as needed.
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