There has been considerable recent discussion in the mortgage servicing industry regarding the increasing hurdles to transfers of residential mortgage servicing rights. Those hurdles include additional scrutiny from the Consumer Financial Protection Bureau, Federal Housing Finance Agency, and state regulators. In the past week, each of Fannie Mae and Freddie Mac have issued updates to their servicing transfer requirements moving up the due dates for requests for approvals of servicing transfers, making it more difficult to consummate quick transfers. The new requirements don’t create new standards for approval of transfers of Fannie Mae and Freddie Mac servicing rights, but they do add a bit more procedural difficulty for such transfers. Read More
On December 3, 2013, the CFPB issued a rule allowing the Bureau to supervise certain nonbank student loan servicers. Student loans represent the second-largest consumer debt market in the country after mortgage loans, and the two industries face similar problems. For instance, many consumers are seeking student loan modifications, just as many consumers are seeking mortgage loan modifications. In fact, the most common type of consumer complaint the CFPB has received about student loan servicing relates to borrowers trying to adjust their repayment terms in times of hardship. The CFPB estimates that 7 million student loan borrowers are in default on their debt. Read More
By: Krista Cooley
Last Thursday, HUD issued Mortgagee Letter 2013-41 to clarify its self-reporting requirements for FHA-approved lenders. The Mortgagee Letter updates HUD’s prior guidance regarding an FHA-approved lender’s obligation to self-report instances of fraud, material misrepresentations, and material findings identified in connection with the origination, underwriting, or servicing of FHA-insured loans. New guidance set forth in this Mortgagee Letter includes direction on the timeframes to which lenders must adhere in reporting findings to senior management and to HUD, as well as clarification regarding what constitutes a “mitigated” finding in connection with the self-reporting requirements. Read More
For at least the third time in recent months, the Federal Housing Administration (“FHA”) has asked Congress for legislative authority to force underperforming loan servicers to transfer the servicing of FHA-insured loans to another servicer.
FHA Requests for Authority to Transfer Servicing
FHA’s latest request came on June 4, 2013, when FHA Commissioner Carol Galante testified before the Senate Committee on Appropriations. In her written testimony, she proposed that Congress provide legislative authority for FHA to require the transfer of servicing “when a servicer is at or below a servicer tier ranking score (TRS) of III, or when the Secretary deems the action necessary to protect the interests of the MMI [Mutual Mortgage Insurance] Fund.” Under these circumstances, FHA would like the power to “(1) transfer servicing from the current servicer to a specialty servicer designated by FHA; (2) require a servicer to enter into a sub-servicing arrangement with an entity identified by FHA; and/or (3) require a servicer to engage a third-party contractor to assist in some aspect of loss mitigation (e.g. borrower outreach).”
At the hearing, Commissioner Galante indicated that some servicers appear to be meeting individual loss mitigation requirements, but their portfolios still have a lower rate of successful loan modifications relative to other servicers. Commissioner Galante stated that there appears to be “something deeper going on” with these servicers that FHA reviews are unable to identify. In situations where FHA cannot get the servicer to improve loss mitigation outcomes “through other means,” FHA would like to require a transfer of servicing.
While Commissioner Galante’s testimony created some buzz in industry publications, her proposal is not a new one. In fact, FHA made identical requests in November and December of 2012. In December 2012, for example, U.S. Department of Housing and Urban Development Secretary Shaun Donovan called the requested authority “a critical step,” and said that it would “send a very strong message to those servicers that are underperforming.” Secretary Donovan also made clear that FHA needs legislative authority in order to force the transfer of servicing as proposed.
Risks Associated with FHA’s Proposal
In making this legislative request, FHA did not discuss the interplay between FHA and Ginnie Mae, or the impact that FHA authority to transfer servicing might have on Ginnie Mae. While FHA insures certain of the pooled mortgage loans underlying Ginnie Mae securities, FHA is not a counter-party to the servicing agreements for such loans. In the ordinary course, Ginnie Mae would be the counter-party under the Guaranty Agreements pursuant to which Ginnie Mae guarantees the servicer’s (or in Ginnie Mae parlance, the “issuer’s”) payment obligations to security holders. Thus, any remedy demanded by FHA will have a ripple effect on the Ginnie Mae servicing rights. In addition, any requirement to transfer servicing or appoint a sub-servicer presumably would have to be accomplished in accordance with Ginnie Mae guidelines.
The risk of FHA forcing a transfer of servicing may dilute the value of the contract right to service, because the servicer may be forced into a distressed sale, particularly if the required time period for the transfer is short. It may lead to a cross-default under other commercial agreements, such as a revolving credit agreement that financed the acquisition or holding of such rights. If it is deemed to be a regulatory action or sanction, FHA’s requirement may have an adverse impact on state mortgage servicing and origination licenses. And the circumstances that give rise to the forced transfer of servicing or appointment of a sub-servicer might be used by Ginnie Mae as an event of default under the Guaranty Agreement and provide an independent basis for Ginnie Mae to terminate the servicing (“issuer responsibility”) with cause.
The bottom line is that FHA’s request for new statutory authority should be carefully considered. While a requirement to transfer servicing is a less drastic alternative than the loss of FHA approval from the perspective of an approved mortgagee, the inability to realize fair market value for the mortgage servicing rights in question could have a significant adverse effect on a servicer. We would hope that any proposed legislation in this area would not authorize FHA to impair valuable mortgage servicing rights without, at a minimum, building in robust “due process” protections and standards of materiality or material adverse effect.