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Nonbank mortgage servicers hold risky amount of debt: FHFA inspector general
WASHINGTON (7/8/14)--The Inspector General of the Federal Housing Finance Agency released a report raising concerns that nonbank financial firms that processing delinquent mortgage payments may lack adequate funding.

This raises the risk for government-sponsored enterprises Fannie Mae and Freddie Mac. The FHFA oversees Fannie Mae and Freddie Mac, and its report was done to assess the ability of Fannie and Freddie to mitigate risks and monitor performance of the nonbank entities.

The report states that of the 30 largest mortgage servicers, nonbank servicers held 17% of the mortgage servicing market by the end of 2013, up from 9% at the end of 2012. Nonbank special servicers currently hold approximately $1.4 trillion in mortgage servicing rights out of a market of nearly $10 trillion.

Banks that traditionally service mortgages backed by Fannie Mae and Freddie Mac have been selling the rights to service delinquent or defaulted loans in bulk to companies that specialize in handling them. The FHFA reports that these transactions can often go to the nonbank servicers, due to the often labor-intensive nature of the loans.

"Overall, [the Office of the Inspector General] concluded that while FHFA and the Enterprises have responded well to specific problems at nonbank special servicers, the agency has not established a risk management process or overall oversight framework to handle some general risks posed by nonbank special servicers," the report reads.

A primary risk highlighted in the report was nonbank entities' use of short-term financing to buy servicing rights for troubled mortgage loans that may only pay out after long-term work to resolve their difficulties.

The report cites an example of one nonbank special servicer that used this procedure. The servicer lacked adequate infrastructure to handle the loans, leading to consumer complaints and delayed payments to the enterprises. The servicer in question was also operating with limited credit availability.

"Such risks are amplified by nonbank special servicers operating without the same standards and regulation as banks that service mortgage loans. Specifically, the nonbank special servicers do not have the same capital requirements as a bank, which means they are more susceptible to economic downturns," the report reads.

The FHFA is among several regulatory agencies that have identified these concerns about the spiking volume of mortgage loans acquired by nonbank special servicers.

The report recommends that the FHFA issue guidance on "a risk management process for nonbank special servicers and develop a comprehensive, formal oversight framework to examine and mitigate the risks these nonbank special servicers pose."

Use the resource link below for the full report.

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