Fannie Mae is giving the mortgage servicing industry's handling of troubled government-backed loans a makeover. But it would rather do so in private.
The government-sponsored enterprise has acquired the rights to service hundreds of billions of dollars of loans and transferred responsibility for managing them to a select group of large subservicers, according to mortgage servicing insiders and analysts. It has specifically acknowledged only one such deal — the August purchase of servicing rights for a $73 billion pool of Bank of America loans — but industry participants believe more than a dozen others have already occurred.
Why the secrecy? Fannie is "under a lot of political pressure, and wants to keep everything" quiet, says Paul Miller, managing director of FBR Capital Markets.
To Fannie, yanking servicing rights from big banks has other appeal, Miller says. Fannie executives "don't like how Bank of America, or any other major servicer, is servicing the loans," he says. "The biggest servicers are totally dysfunctional and putting no resources into the process."
Even so, the secrecy of Fannie's deals has some worried that it is using government funds to further entrench itself in the mortgage market. Members of Congress from both sides of the aisle are howling about Fannie's lack of disclosure.
Longtime industry executives complain that Fannie could be cutting deals that wouldn't make economic sense in the private sector. At a time when many lawmakers are pressing to wind down Fannie and fellow GSE Freddie Mac, Fannie's servicing push is "a game plan for survival," says a former Fannie executive still in the industry.
Fannie dismisses such concerns. The recent servicing transfers are simply the best way to protect itself from losses resulting from botched loan management, says Amy Bonitatibus, a spokeswoman for the company.
"When we identify a segment of our loans where credit losses may be substantial with the existing servicer, we will facilitate a transfer to a specialty servicer that has capacity and expertise in handling high-touch loans," she says. "We currently work with four specialty servicers who have all helped us to reduce credit losses by working more closely with homeowners to prevent foreclosures."
The Federal Housing Finance Agency, which oversees Fannie and Freddie, has been as reluctant to discuss Fannie's acquisitions as Fannie has. The agency declined to reveal the terms of the Bank of America deal in September. American Banker subsequently submitted a Freedom of Information Act request seeking the documents pertaining to the contract and others like it. The FHFA's staff uncovered 4,000 pages of documents realated to the FOIA request but said not a single one was releasable, even in redacted form. American Banker has appealed the decision.
Adding to the secrecy concern is the fact that Fannie is handing its subservicing work to a small group of specialists whose top ranks include former Fannie officials.
"It's a fantastic deal for these subservicers," says David Stephens, chief financial officer of United Capital Markets, which provides consulting and hedging services to mortgage companies. "We're wondering what Fannie's motives are. Are they going to be a big competitor? All these questions are up in the air."
The subservicing industry is big and getting bigger. It currently manages portfolios containing roughly 1.1 million home loans, says Walter Investment Management, parent company of the specialty servicer Green Tree Credit Solutions. That number will grow to 3 million loans next year, it says.
Some of the specialty servicers' business will come from private investors or banks, but Fannie Mae already accounts for a significant and growing share of the volume. (The FHFA and Freddie Mac are considering getting into the specialty servicing business themselves but are yet to do so, servicing analysts and others say.)
An insight into the considerable role that Fannie and Freddie play in supplying specialty servicing business comes from Nationstar, a servicer that Fortress Investment Group built out of the home builder Centex's former affiliated mortgage operation. Of the total of $60 billion in loans that Nationstar has taken responsibility for servicing since 2008, more than 40% was sourced from a single GSE in the last two months of 2010, according to May securities filings. Nationstar has a "strategic relationship agreement" with Fannie Mae and says it believes it "will continue to benefit from our strong relationships with the GSEs" and other investors," the filings state.
The rationale for transferring the loans is the widespread view that servicing practices have exacerbated the mortgage crisis. During the boom years, servicing was consolidated among a handful of banks that were adept at processing mortgage payments in bulk.
When borrowers began to fall behind on their loans, however, the efficient system went off the rails. Major servicers were ill-equipped to handle large-scale defaults and lacked both the organizational capacity and financial incentive to develop them. The industry entered an ugly period in which Fannie lost money, servicers were fined for mishandling mortgages and borrowers missed chances to save their homes.