A recently released report from the Financial Stability Oversight Council (FSOC) that identifies vulnerabilities at nonbank mortgage servicers and makes some recommendations to avoid systemic risk is a ”tall order” for state regulators but isn’t only a ”wishful list,” according to Jason Cave, principal at Piedmont Risk Advisors LLC.
Cave spent nearly three decades in executive roles at the Federal Deposit Insurance Corp. (FDIC), including as a representative on the deputies committee of the FSOC, where he helped to build its nonbank designation program. After that, he spent about three years at the Federal Housing Finance Agency (FHFA), where he became deputy director and the chief fintech officer. He left the FHFA in February.
According to Cave, the report shows that FSOC has learned from past experiences that the better approach is ”to work with the current structure” to fix the regulatory framework that could pose systemic risk. In this case, the FSOC recognizes that the authority relies on the states, not the federal government.
”They’ve been clear in the document that the states have primary prudential oversight over these companies [nonbank servicers],” Cave said in an interview with HousingWire. ”One thing was interesting to see in a report like this: they must have mentioned four or five times that the federal government has little authority or ability to intervene here. You normally don’t see that in the FSOC report.”
If things don’t work at the state level, then Cave believes it could be brought to the national level. Others in the industry believe that’s the correct arena to deal with broader housing regulation. Mortgage Bankers Association (MBA) president and CEO Bob Broeksmit floated the idea last week to appoint a federal housing czar and place them in the White House.
The FSOC recommends that Congress should give the FHFA and Ginnie Mae additional authority to establish appropriate safety and soundness standards, directly examine counterparties, enforce compliance, and authorize Ginnie Mae and state regulators to share information, among other things.
The report recommends directly to state regulators that they require recovery and resolution planning by large nonbank mortgage servicers to enhance the sector’s financial and operational resilience.
”The states will have a fair amount of work to do. If I were the state regulators, I would look at this closely and see where we need to up our game … That’s a tall order to do at a state level,” Cave said. ”Some people have already said this is just a wish list for Congress and will never happen, but I disagree.”
Cave commended the fact that Ginnie Mae was brought into the process — since servicers usually complain about the advances Ginnie requires and the costs related to them — and that the FSOC did not show its intention to bring the servicing business back to banks, recognizing the innovation of nonbanks and their roles in underserved communities.
The FSOC report states that nonbank servicers increased their market share from 4% in 2008 to 54% in 2022.
To improve liquidity, the FSOC recommended expanding Ginnie Mae’s Pass-Through Assistance Program (PTAP) — and creating a fund established by Congress and financed by servicers — to help them when they are in bankruptcy or have reached the point of failure.
Cave said that ”it’s important to note too that servicers have been building liquidity” and ”there have been new eligibility standards by Fannie Mae, Freddie Mac and Ginnie Mae.”
Some trade groups have criticized the increased costs and complexity that the process will bring. It’s a ”fair point,” but there’s also ”costs and complexities” in the current process, Cave added.
Regarding the timeline, the chances of changes happening ”in the short term are pretty remote,” Cave said. And recommendations that require congressional approval would take longer due to the political process, he said.
