Letter to FHFA on re-proposal of eligibility requirements for Fannie Mae and Freddie Mac non-depository single-family seller/servicers

The Honorable Sandra Thompson
Acting Director
Federal Housing Finance Agency
400 Seventh Street, SW
Washington, DC 20219

Submitted via email to: [email protected]

Dear Acting Director Thompson:

The American Bankers Association appreciates this opportunity to comment on the Federal Housing Finance Agency’s re-proposal of eligibility requirements for Fannie Mae and Freddie Mac (the Enterprises) non-depository single-family seller/servicers.

ABA supports this effort to strengthen the safety and soundness of the housing finance system and in particular, to address concerns related to the capital and liquidity requirements for non-depository seller/servicers.

Key elements of the re-proposal include:

• A Capital Ratio increase from 6% to 9% for nonbank seller/servicers.
• A base liquidity of 0.07% of the seller/servicer’s Enterprise servicing for scheduled/scheduled terms versus 0.035% for servicing with scheduled/actual or actual/actual remittance requirement; the base liquidity for GNMA servicing is 0.10%.
• The requirements would apply to independent mortgage bank (IMB) servicers, with certain additional requirements placed on large IMB servicers – those servicing greater than $50 billion.

ABA shares FHFA’s view that well-capitalized and resilient Enterprise counterparties are essential to support a diverse and competitive mortgage market that benefits consumers and furthers the Enterprises’ mission. The recent rapid expansion of nonbank servicers affirms that non-depositories have become an important (and increasingly dominant) component of the national mortgage market. Therefore, to ensure the long term stability of the Enterprises and the housing market, it is critical to evaluate the adequacy of the net worth and capital ratio requirements for non-depository seller/servicers.

We note that while many nonbank mortgage servicers may have started as specialty/default servicers, they now operate with similar business models as large bank-owned mortgage originator/servicers— but without the strict regulatory regime that governs depositories. The importance of these firms was highlighted during the initial stages of the pandemic, as was the potential fragility of their businesses. Without the swift action of the Federal Reserve and Treasury, which helped stabilize financial markets during the Pandemic, potential failures of nonbanks may have damaged the U.S. economy. The exceptional situation presented by the COVID-19 pandemic prompted an unprecedented need for borrower forbearance, which strained nonbank servicers’ liquidity reserves. The financial stress was most pronounced for nonbank mortgage servicers, as their business focuses almost exclusively on mortgage servicing operations, and they have fewer funding options and limited liquidity risk management expectations compared to depositories. While the potential disaster related to margin calls was narrowly averted, this sector will continue to be vulnerable to widespread increases in delinquency or payment forbearance needs brought on by unforeseen contingencies, including future economic shocks.

Therefore, it is essential to protect the Enterprises from systemic risks arising from all counterparties, and it is a prudent for FHFA to ensure that the entities doing business with the Enterprises have the financial wherewithal necessary to weather all economic cycles. This is especially true given the absence of consistent and reliable resolution mechanisms for many of these businesses – other than bankruptcy – and the lack of broader industry capacity to absorb severe servicing shocks. Lessons learned at the outset of the ongoing COVID pandemic underscore these points.

As FHFA notes, it is not in their mandate to examine the Enterprises’ counterparties or to establish regulatory requirements for those entities’ capital standards. It is, however, within FHFA’s authority to establish appropriate minimum standards for those counterparties seeking to do business with the Enterprises. Indeed, failure to do so would run counter to necessary prudential regulation of the Enterprises and FHFA’s clear mandate to ensure their safety and soundness.

ABA also recommends that updated eligibility standards for nonbank mortgage servicers should be imposed with reasonable phase-in periods that give covered institutions ample time to come to compliance with enhanced capital and liquidity reserves. As a general rule, non-depositories retain less capital than depository institutions. In addition, mortgage servicing rights (MSR) value is often one of the largest components of nonbank net worth, which can result in a “double-leverage” situation since the MSR (and thus the net worth) would be greatly diminished in a downturn. As mentioned, ABA believes it is appropriate that these standards are strengthened, but the policy objective is, and should remain, to enhance systemic safety and soundness, not to inadvertently force firms to end participation for inability to comply. ABA recommends that FHFA adopt an appropriate phase in period so that institutions can properly build up reserves necessary to remain operational.

We appreciate FHFA’s continued attention to these issues, and the proposed revisions reflecting lessons learned from the pandemic. We urge FHFA to adopt the re-proposed standards to further ensure the safety and soundness of the Enterprises and to protect the health of the entire single-family mortgage market system.

If you have questions or wish to discuss these comments further, please contact the undersigned at [email protected].

Sincerely,

Joseph Pigg
SVP, Mortgage Finance