Fitch: Non-Bank Mortgage Servicers Face Increasing Regulatory Scrutiny

Fitch Ratings, New York, said regulatory scrutiny of servicing practices at U.S. mortgage companies is expected to increase in 2022 as pandemic-related government forbearance programs expire and borrowers transition into other permanent loss mitigation alternatives or default.

Fitch said enforcement actions and resultant fines could rise with greater scrutiny from various regulators stemming in part from elevated customer complaints, which could lead to increased headline/reputational risk for mortgage companies and potentially higher regulatory capital requirements.

Fitch noted, however, a modest increase in fines and/or higher regulatory capital requirements, as could be seen with the planned reintroduction of the Federal Housing Finance Agency’s increased net worth, liquidity and capital standards, are unlikely to be a ratings event for larger rated non-bank mortgage servicers. Fitch said record profitability in 1Q20 to 1Q21 has bolstered capital and liquidity profiles for most servicers, with larger servicers also able to extend their liquidity profiles with longer dated unsecured issuances.

“The expanded regulatory framework for mortgage servicers since the global financial crisis has been supportive of ratings, along with servicers implementing enhanced systems and processes, investments in technology and increased automation, allowing servicers to respond to regulatory concerns more effectively,” the report said.

Fitch also noted the U.S. mortgage industry is already subject to extensive federal- and state-level regulations, which rapidly evolved during the economic fallout from the pandemic amid the transition to more automated and remote business platforms. The Consumer Finance Protection Bureau has prioritized mortgage servicing oversight under the new administration.

The report said nearly eight million U.S. homeowners have entered forbearance and loss mitigation programs since March 2020, with nearly six million homeowners since exiting the program with loans in performing status or paid off, according to the CFPB. The current- to 30-day delinquency transition rate for mortgages fell to 0.7% in October 2021 from 3.4% in April 2020, when mortgage forbearance-related consumer complaints were also at their peak.

The national mortgage delinquency rate was 3.38% in December 2021, 10 basis points above the record low in February 2020. Loans in active foreclosure fell to an all-time low in December 2021 at 0.24%, with 4,100 foreclosure starts, which was nearly 90% below December 2019 levels despite the recent expiration of the foreclosure moratorium.

However, Fitch cautioned foreclosure activity could rise in 2022, inviting additional regulatory scrutiny given the number of borrowers who have been exiting accommodating programs in recent months as well as rising interest rates limiting refinancing options. According to Fitch research, forbearance plans for non-prime, non-bank servicers, which peaked at 71% of all loan workout options in 1Q21, saw a 10% decline in 3Q21 as borrowers exited forbearance agreements, while the number of loan modifications tripled to 19% from 6.6% year over year.

The report noted liquidity concerns related to servicing advance obligations for non-bank servicers at the onset of the pandemic have abated, as forbearance take-up peaked in July 2020, mitigated by government stimulus programs and substantial home-price appreciation. The valuations of mortgage servicing rights are also improving with recent increases in mortgage rates and subsequent drops in refinancings, with increased MSR transaction activity enhancing liquidity.