The federal government is limited in its ability to oversee the housing market due to a trend that has emerged since the financial crisis—one that disproportionately impacts the poor and troubled borrowers.
Non-bank firms grew to account for nearly one-quarter of the mortgage servicing market in 2015, up from 6.8 percent of the sector in 2012, according to a report published Monday by the Government Accountability Office.
The development has left the Consumer Financial Protection Bureau (CFPB) and the Federal Housing Finance Agency (FHFA) hamstrung in their efforts to offer Americans some measure of protection from industry recklessness.
The CFPB currently lacks the mechanism to even obtain “a comprehensive list of nonbank servicers,” the report stated, while FHFA “lacks statutory authority” to examine servicers of mortgages insured by the federal government, “in contrast to bank regulators.”
Moreover, GAO noted that this activity is caused by banks ignoring consumers whose creditworthiness was harmed by the Great Recession, raising the specter of vulnerable Americans again being served systematically by predatory housing industry actors.
“After the 2007-2009 financial crisis, an increase in delinquent loans and other factors led some banks to exit the mortgage servicing business and created opportunities for increased participation by nonbank entities,” the report stated. It said that “aggressive growth and insufficient infrastructure” in the non-bank mortgage servicing industry already has “exposed counterparties to operational and reputational risks.”
Mortgage servicers are businesses that buy the rights to oversee borrowers’ monthly payments from mortgage originators. They mostly make money in fees. If mortgage servicers fail to do their jobs properly by insufficiently documenting payments, for example, debtors can find themselves punished by creditors for no mistake of their own.
GAO also found non-bank servicing activity gravitating toward mortgages insured by taxpayers, raising the probability of widespread nationalization of shoddy assets overseen by the private sector, in the event of a shock to the market–as there was in 2008. Thirty-five percent of all mortgages backed Fannie Mae and Freddie Mac are serviced by non-bank actors.
“[O]fficials from the enterprises and Ginnie Mae told us they would intervene to acquire the failed servicer’s [mortgage servicing rights] or coordinate with the servicer through its bankruptcy process to help ensure that the loans continue to receive service,” GAO noted. “Enterprises” refer to Fannie Mae and Freddie Mac. Ginnie Mae is also a government-sponsored enterprise that insures mortgage-backed securities with underlying debt backed by government agencies–primarily the Federal Housing Administration and the Veterans Administration.
The report was flagged on Monday by Sen. Elizabeth Warren (D-Mass.) and House Oversight Committee ranking member Elijah Cummings (D-Md.). The pair asked CFPB in a letter sent Monday to improve its data collection of non-bank servicers—something it will likely be able to do without Congress intervening.
The oversight deficiency impacting the FHFA, however, is something the agency can do nothing about. In its report, GAO first recommended that Congress “consider granting FHFA authority to examine third parties that do business with the enterprises.”
The investigation did note that because the industry still hasn’t become heavily concentrated, non-bank mortgage servicers aren’t likely to rapidly cause a widespread systemic crisis–unlike the Wall Street firms and mortgage originators of last decade.
GAO did note, ominously, that there was “[a]n exception to this trend” in the subprime mortgage market—the segment of the housing market at the heart of last decade’s collapse.
“[O]ne nonbank servicer accounted for over 28 percent of all subprime mortgages serviced in 2014,” the report stated, “exceeding the amount serviced by the two largest bank servicers combined.”
