Mortgage servicing includes core functions of administering the mortgage. The mortgage servicer collects the borrower’s payment and distributes it to investors, and pays escrow payments to insurance companies and property taxes to local governments. Missing these payments could result in foreclosure or being denied coverage after a natural disaster. Servicers are also responsible for working out alternative payments with the homeowner when they face difficulties maintaining their mortgage. When all else fails, servicers manage foreclosures and evictions. When mortgage servicers can’t do their job right, the impacts on families, communities and the financial system can be significant.
Congress created FSOC after the financial crisis to “identify risks to … financial stability” along with the obligation “to respond to emerging threats to the stability of the … financial system.” Nonbank mortgage servicers may well pose such risks. That’s why FSOC is right to focus on mortgage servicers and ring the alarm bell before a massive wave of problems occur.
But Congress also tasked FSOC with the responsibility “to promote market discipline, by eliminating expectations … that the Government will shield … losses in the event of a failure.” By suggesting Congress create a backstop for mortgage servicers, FSOC undermined market discipline. If Congress were to go forward and create such a backstop, expectations in the market would be that mortgage servicers were guaranteed by taxpayers — undermining market discipline and reviving the cycle of privatizing gains and socializing losses. The last thing the country needs is to put taxpayers on the hook for mortgage servicers in addition to such expectations for other large financial institutions.
An alternative approach FSOC should consider is to focus on the banks, credit unions and government-sponsored enterprises who make or own most of these mortgages and ensure they are able to support themselves in times of stress. In its report, FSOC rightly highlighted that state regulators are the primary regulators overseeing nonbank mortgage servicers and many may need to step up their game, including by enhancing coordination between states and ensuring that a servicer has a resolution plan so that borrowers are not holding the bag should their servicer go under.
FSOC should also direct its member agencies to set standards for mortgage servicer companies that do business with banks, credit unions and Fannie Mae, Freddie Mac or Ginnie Mae. FSOC suggests that federal regulators lack current legal authority to do so in all cases. Lawyers may disagree how much is authority versus regulatory will, but if more authority is needed, Congress should consider that without establishing any bailout programs. If that means some mortgage servicers cannot remain profitable with enough private capital, then the market will decide and adapt.
The catastrophic financial crisis of 2008 was the result of multiple layers of failure, many of which involved the mis-regulated and flawed operation of America’s mortgage market. Congress passed multiple laws, which we helped create, with a simple goal in mind: creating a safer financial system that would never require taxpayer funded bailouts. This system already failed its first tests, as regulators and Congress bailed out investors and creditors when Covid-19 struck and again when Silicon Valley Bank failed.
Instead of accepting that bailouts are inevitable — or actively promoting them — FSOC needs to use its power and authority to improve the oversight of our mortgage markets, and make clear that if a mortgage servicer or any other financial institution fails, it will be private investors and creditors who lose money, not taxpayers. That is the way to ensure market discipline and end the bailout cycle.
