Mortgage Servicers Face Further Scrutiny from Fannie, Freddie: Report

Nonbank mortgage servicers are already in the crosshairs of regulators. Now they will face even more scrutiny from Fannie Mae and Freddie Mac.

The Federal Housing Finance Agency, which oversees the government-sponsored enterprises, issued an advisory bulletin on Monday requiring Fannie and Freddie to develop a risk management framework with ongoing monitoring of mortgage servicers that service loans insured by Fannie and Freddie. The FHFA's formal framework requires routine exams, reviews and testing to ensure servicers, particularly nonbanks, can meet current requirements.

Among the FHFA's concerns is that servicers will not have adequate access to capital if the economy sours and they are hit with waves of defaults. Delinquent loans are a huge financial burden for mortgage servicers, which have to forward principal and interest payments to bondholders even when a borrower stops paying their mortgage.

Still, complying with the new requirements could be costly. Jaret Seiberg, an analyst with Guggenheim Securities, wrote Tuesday that the FHFA's requirements are "death by a thousand cuts," and part of a broad theme that "government policy will continue to be a negative for servicers." He called the advisory "another cost that will make it harder for servicers to profit off their existing book of business."

The formal framework creates standards for assessing, monitoring and managing servicers. The policy also requires that significant issues or exceptions be reported to the GSEs' senior management and boards.

The FHFA's advisory bulletin comes on the heels of a July report from the agency's Office of Inspector General, which found that some nonbank servicers have weak infrastructures and are lax in handling borrower complaints.

Since last year, regulators have ratcheted up their scrutiny of nonbank mortgage servicers after receiving thousands of complaints from borrowers for mishandled foreclosures, denied loan modifications and overcharging on fees. Benjamin Lawsky, the Superintendent of New York's Department of Financial Services, has launched separate investigations into two nonbank servicers, Ocwen Financial and Nationstar Mortgage.