The regulator of Fannie Mae and Freddie Mac (FMCC:US) should strengthen its oversight to protect the two companies from risks posed by nonbank mortgage servicers, according to an auditor’s report released today.
Nonbank servicers’ rapid growth and reliance on short-term financing has left some of them unable to adequately manage loans backed by the two government-sponsored enterprises, the report from the Federal Housing Finance Agency Office of the Inspector General said.
Since Fannie Mae and Freddie Mac back the loans, “such strains can increase credit risk,” the report said. “In addition, poor or interrupted servicing -- particularly for vulnerable homeowners with troubled mortgage loans -- can risk the enterprises’ reputation.”
Nonbank companies including Nationstar (NSM:US) Mortgage Holdings Inc. and Ocwen Financial Corp. (OCN:US) have been handling a growing share of loans backed by government-owned Fannie Mae and Freddie Mac as banks seek to shed the job of collecting mortgage payments and dealing with delinquent borrowers. Unlike banks, the specialty servicers aren’t overseen by a federal regulator responsible for ensuring their financial soundness.
Fannie Mae and Freddie Mac buy mortgages and package them into securities on which they guarantee payments.
The report cited the case of one unnamed firm that acquired rights to manage billions of dollars in loans and then was unable to adequately service them even after the FHFA increased surveillance of its operations. Both Fannie Mae and Freddie Mac required the company to address operational flaws before taking on more servicing work.
The FHFA already is working on new risk-management guidelines for Fannie Mae (FNMA:US) and Freddie Mac to use in their contracts with nonbank servicers, Nina A. Nichols, acting deputy director at FHFA, said in a written response to the report.
“FHFA concurs that servicing of troubled loans by nonbank servicers may entail operational and financial risks for the Enterprises,” Nichols said.
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