Although the Federal Housing Finance Agency approved a settlement between Fannie Mae and Bank of America (BAC) by following its settlement review policy and procedures, the policy did not apply to agreements regarding the transfer of mortgage servicing.
Consequently, the conservator’s review of these aspects of the settlement did not benefit from such an established process.
The most important improvement FHFA needs to consider is the development of procedures for settlements — along the lines of those applicable to mortgage purchases — of compensatory fee claims and significant mortgage servicing right transactions, urged the Office of Inspector General in a new report.
In September 2011, the government-sponsored enterprise met with the banking giant to negotiate a settlement of the enterprise’s claims.
Both parties agreed to an $11.6 billion settlement, which resolved Fannie Mae’s claims that Bank of America sold it defective mortgages and mishandled various mortgages it was servicing for the GSE.
Additionally, FHFA allowed the transfer of the servicing rights to approximately 1.1 million mortgages from the mega bank to other servicers.
Fannie Mae approved Bank of America’s proposed sale of MSRs to certain specialty servicers, which was not part of the formal settlement agreements.
However, FHFA recognized that the negation of the compensatory fee exposure was directly related to the MSR transfer, and was structured to provide greater leverage in the negotiation and recovery of funds owed to the enterprise.
To its credit, the FHFA established a policy in reviewing the representation and warranty settlement between Fannie Mae and Bank of America, but its policy did not apply to the resolution of mortgage servicing, the OIG concluded in a report this week.
The overall issue at hand is that the OIG believes the FHFA did not oversee high-touch servicers during the settlement between Fannie Mae and Bank of America.
Going forward, the OIG wants the conservator to oversee such activities involving specialty servicers with a sharper eye.
Some mortgage analysts believe such a recommendation means more regulation and oversight, which comes with both, perks and drawbacks.
"At the end of the day, it is probably good for these MSR’s to move to a new special servicer that will have more of a loss mitigation focus. Though, we can debate who is even a ‘high touch’ servicer. Nationstar? Ocwen? Doesn’t seem like it," a mortgage industry professional explained.
On the reverse side, Statebridge Company, which focuses on high-touch special servicing, president and CEO Kevin Kanouff believes it means more opportunity "for servicers and perhaps, better service for the applicable borrowers."
In the past, both OIG and FHFA have expressed concerns regarding enterprise servicing transfer activities.
However, the rapid growth of specialty servicers in the market increased Fannie Mae’s operational risk, particularly in light of the fact that Bank of America had plans to transfer significant servicing portfolios to such entities.
"Based on the OIG and the agency’s Division of Enterprise Regulation studies, FHFA was aware of the complexity of, and risk associated with, large MSR transfers to specialty servicers. Thus, FHFA was aware of the significance of its own review of the specific transfers proposed," the report explained.
Although FHFA has revised and refined its delegations of authority to the GSEs, it continues to consider servicing transfers to be matters within the enterprises’ regular business activities.
Nonetheless, the conservator was involved in most aspects of the settlement between Fannie Mae and Bank of America — and after reviewing the MSR transfer — decided to allow the settlement to proceed.
"It’s an interesting question from a public policy perspective as there were loans subject to settlements and there is concern that the borrowers are getting the benefits of those settlements and agreements," a mortgage industry professional interviewed by HousingWire stated.
They concluded, "The other issue, that happens whenever loans are transferred, is disruptions and disconnects with loss mitigation efforts that were underway at the previous servicer. Sometimes, the borrower claims that a mod or another loss mitigation solution was underway and there is no record of it."