The Federal Housing Adminstration wants Congressional authority to transfer an FHA-insured mortgage to another servicing shop whenever a loan poses a threat to FHA's mutual mortgage insurance fund.
The plan, which FHA Commissioner Carol Galante proposed in written testimony before the Senate Committee on Appropriations, comes with a few inherent risks – namely the risk that Ginnie Mae could be adversely impacted by sudden transfers of FHA-insured loans underlying Ginnie Mae securities, said K&L Gates attorneys Laurence Platt and Kathryn M. Baugher, who issued a report on the proposal.
The attorneys explained in a research note, "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."
Yet, Galante proposed the plan on the grounds that a transfer should occur when a servicer is either at or below a servicer-tier ranking score of III or when it’s necessary to preserve the mutual mortgage insurance fund.
If either of those conditions are met, Galante would like the FHA to have an option of transferring a loan from one servicer to a specialty servicer or the ability to require a servicer to enter into a sub-servicing arrangement with an entity designated by the FHA. Another option would be requiring a servicer to contract with a third-party to assist with loss mitigation issues.
The idea is to prevent the FHA from facing losses tied to poor servicing.
Given the proposals potential impact on Ginnie Mae, K&L Gates suggested the plan should be considered carefully.
"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," K&L attorneys wrote.
"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."