On January 30, 2015, the Federal Housing Finance Agency (FHFA) proposed new minimum financial eligibility requirements for non-bank sellers and servicers of mortgage loans to Fannie Mae and Freddie Mac (the GSEs). The proposed minimum financial requirements include net worth, capital ratio, and liquidity criteria for the non-bank mortgage firms and are an attempt to curb perceived risks to the GSEs, and ultimately the tax payers, amidst a post-financial crisis industry shift that has resulted in non-bank mortgage firms playing an expanded role in mortgage servicing. The proposed requirements, which are set forth in more detail below, are open for public comment, expect to be finalized by mid-2015, and will take effect six months from the date they are finalized. With the private securitization market still recovering from the financial crisis, almost all residential mortgage loans that originated in the United States are sold to the GSEs or U.S.-owned Ginnie Mae. As a result, these new requirements will affect almost all non-banks that are active in the mortgage market.

The Changing Landscape of the Mortgage Servicing Industry Post-Financial Crisis -

Banks historically dominated the mortgage servicing industry due to their roles as loan originators and aggregators, their access to cheap capital, and their desire to benefit from favorable regulatory and U.S. accounting treatment given to mortgage servicing rights, or MSRs. But during the financial crisis, the mortgage servicing industry’s customer service standards and foreclosure practices became the subject of countless news stories, Congressional hearings, lawsuits and regulatory actions. Banks have paid billions of dollars in legal and regulatory settlements and have spent millions of dollars updating internal policies and procedures to comply with the terms or conditions of consent orders and new servicing standards. In addition to rising litigation and compliance costs, banks now are facing regulatory changes that make holding MSRs on their books cost-prohibitive despite their value under U.S. accounting rules, their use as a natural hedge against rising interest rates, and their impact on banks’ mortgage origination businesses. The passage of the capital standards adopted in the U.S. pursuant to the Dodd–Frank Wall Street Reform and Consumer Protection Act as set under the Basel III international capital accords eliminated the favorable treatment of MSRs, which previously could comprise up to 50% of a bank’s Tier 1 capital. Now faced with the increased regulatory, legal, and reputational risks of operating in the post-financial crisis environment, many banks are feeling pressure to exit the mortgage servicing business or decrease their mortgage servicing portfolios.