2101 Wilson Boulevard, Suite 610
Arlington, VA 22201
November 6, 2014
The Honorable Gene L. Dodaro
Comptroller General of the United States
Government Accountability Office
441 G Street NW
Washington, DC, 20548
GAO Study of Risk of Nonbank Servicers
Dear Mr. Dodaro:
The Community Home Lenders Association (CHLA) writes to offer our comments with respect to the recent letter sent by Senator Elizabeth Warren and Representative Elijah Cummings requesting that the GAO analyze the “risks posed to consumers by the unprecedented growth in nonbank specialty mortgage servicing” and more generally, to study nonbank servicers.
As the only national association exclusively representing nonbank mortgage bankers, we would be happy to meet with you to discuss these issues in more detail. For now, we write to provide our perspective on the role and relative risks of community-based mortgage lenders that also service the loans they originate.
NONBANK COMMUNITY LENDERS ARE HIGHLY REGULATED
We understand that the GAO letter request cited above included a focus on large purchases of mortgage servicing rights (MSRs) by nonbank specialty servicing firms. The main purpose of our letter is not this issue in particular, but we do have a few observations. First, there is evidence that both the large nonbank AND bank mortgage servicers have problems, with the evidence of the latter found in the major settlements with the big banks that included significant problems with respect to servicing. Initially, it does seem that recent reports of problems with nonbank servicers reflect these same types of concerns. Moreover, we would note that a significant portion of the increase in mortgage servicing rights among nonbank servicers arises from specialty servicers purchasing these rights from the big banks, who apparently are exiting this sector to some extent, in the wake of their large settlements.
Separately from that segment of the market, we do want to point out that an important segment of the market of loans serviced by nonbank mortgage firms is through small and mid-sized lenders that originate mortgage loans and service the loans they originate. While these nonbank lender/servicers do not enjoy the backstop of federal taxpayers through the FDIC, as the banks do, they are heavily regulated, both financially and operationally. Any analysis of the risk of nonbank lender/servicers needs to take this into account.
First, a measurable portion of loans originated and serviced by community-based nonbank mortgage firms are Fannie Mae, Freddie Mac, or FHA loans – with FHA loans typically securitized through Ginnie Mae. Ginnie Mae, FHA, Fannie Mae, and Freddie Mac all have stringent capital standards for mortgage firms that service loans, to address both mortgage loan pool advance responsibilities, and to address counterparty risk related to potential repurchase/indemnification liabilities.
Secondly, nonbank community-based mortgage lender/servicers are regulated by the CFPB and subject to their audits and enforcement, both with respect to origination and servicing. Nonbank community-based mortgage firms are also subject to the same rules that banks and other FDIC-insured lenders are subject to pursuant to Dodd-Frank, dealing both with origination of loans (e.g., QM, LO Comp, others) and with the servicing of these loans, including consumer protections and requirements for loss mitigation.
Third, unlike the individual mortgage originators that work at the banks, mortgage originators that work at nonbank mortgage lenders are required to undergo an independent background check, take 20 hours of SAFE Act prelicensing courses, and pass the SAFE Act mortgage competency test prior to working with consumers – and are also required to complete 8 hours a year of SAFE Act continuing education courses. This both enhances consumer protections and improves the quality of the loan origination on loans community banks ultimately service – again, pursuant to requirements from which the banks are exempt.
Finally, the performance of nonbank community-based lender/servicers has withstood the shocks of the greatest housing crisis since the Great Depression. These firms generally avoided the rush to do subprime loans that the big bank securitization machines produced, and avoided the need for TARP or Federal Reserve bailouts that characterized the Too-Big-To-Fail banks and other large institutions that were active in the mortgage market during the 2008 housing crisis.
NONBANK COMMUNITY LENDERS ARE DIVERSIFIED
Community-based nonbank mortgage lender/servicers generally represent lower risk than the very large nonbank and TBTF bank mortgage servicers because they are smaller and thus more diversified as a group. This significantly reduces the risks associated with the failure of any individual firm, and in a comparable manner, reduces the level of disruption and other risks to consumers of an individual failure.
Nonbank lender/servicers are also more diversified financially than firms that only do servicing because their ongoing business includes not just servicing, but also loan origination. As such, their ongoing profitability, and therefore financial stability, is not as dependent on the value of MSRs as servicing-only firms.
Finally, we would note that the letter cited above refers to “unprecedented growth in specialty nonbank mortgage servicing” which is distinct from nonbank servicers that generally just service the loans they originate. It is true that nonbank mortgage originators have generally increased their share of the overall mortgage origination market in recent years – to some extent as a result of many banks exiting the mortgage origination business or curtailing lending through credit overlays. But overall levels of mortgage origination, and the resulting volume of loans serviced among community-based lenders, has not experienced anything close to unprecedented growth. Therefore, we believe this does not pose the type of risk alluded to in this letter.
NONBANK COMMUNITY LENDERS HAVE CLOSE RELATIONSHIPS WTIH BORROWERS
The letter cited above also asked GAO to look at risks posed to consumers by nonbank mortgage servicers. One of the clear advantages of the community mortgage lender model is that these lenders grow their servicing organically – that is, they service loans to those borrowers to whom they originated said loans, and have had a relationship with, beginning with the underwriting of that loan. There are many advantages to the borrower as a result of this ongoing relationship, including an enhanced ability to work with the borrower and do loss mitigation to help keep the borrower in their home should they encounter financial difficulties and default, or otherwise have trouble making mortgage payments.
PROBLEMS WITH FHFA IG REPORT
Finally, the letter cited above alludes to a July report issued by the Federal Housing Finance Agency (FHFA) Inspector General (IG) that highlights the fact that nonbank specialty servicers specializing in delinquent or defaulted loans now hold $1.4 billion in servicing rights, and refers to a $2 billion CFPB settlement with the largest nonbank mortgage servicer in the country. Your letter also cites references in the IG report to a rise in the number of complaints, lawsuits, and regulatory actions among nonbank mortgage servicers. We believe that a closer examination of this issue, making the proper distinctions highlighted in this letter between the two types of nonbank servicers, will demonstrate that these problems are not indicative of nonbank community-based lenders that simply service loans that they originate.
In addition, we have a number of substantive criticisms of the casual way in which the IG report made sweeping generalizations about nonbank mortgage firms. Therefore, on July 2nd, the CHLA sent a letter to FHFA Director Watt which identifies these criticisms in great detail. These include:
* The IG Report offered no tangible evidence or numerical analysis of smaller nonbank lender counterparty risk
* The IG Report offered no real evidence of increased reputational risk from smaller lenders
* The IG Report ignored a broad range of recent rules and enhanced supervision of smaller nonbank lenders
We are also enclosing this letter. (See CHLA Letter to FHFA Director Watt under “Actions” – July 2, 2014)
COMMUNITY HOME LENDERS ASSOCIATION
CC: Sen. Elizabeth Warren
Rep. Elijah Cummings