Things can turn problematic for a mortgage servicer if a borrower defaults. The servicer is still obligated to keep sending monthly payments to the mortgage investors even though it's no longer collecting any money from the borrower. Eventually, Fannie or Freddie reimburses the servicer. But in the meantime, there can be a serious cash crunch.

To make sure they have sufficient liquidity, nonbanks often borrow money against their mortgage-servicing rights. Freddie is now getting into the business of providing nonbanks that kind of credit. Banks, in contrast, don't often need such financing because they have deposits and other business lines to fall back on.

Freddie Chief Executive Officer Don Layton said in an interview last week that the credit will fill in gaps not served by the private market and that Freddie's risk exposure won't increase, since the company already is vulnerable when one of its servicers goes under. He said Freddie has closed one transaction so far and that it partnered with other lenders on the deal.

“We're not trying to undercut the private market,” Layton said. “If it works, you've got another lender in the marketplace.”
The move is causing angst among some industry trade groups that say Freddie will target its financing at the biggest servicers. The groups also predict Freddie will charge comparatively low interest rates, putting small servicers at a disadvantage.

Officials with the Mortgage Bankers Association, the largest mortgage trade group, say they and their members haven't been told who's eligible for the credit lines.

“There's been no transparency about this,” said MBA chief economist Michael Fratantoni. “Our major concerns are around the unleveling of the playing field” between large and small lenders, he said.

Ed Wallace, executive director for the Community Mortgage Lenders of America, said he's worried a program not available to small companies could “play into the national lenders' hands.”
Some regulators have said they're becoming increasingly concerned that nonbanks might fare badly in a downturn.

Last month, authors from the Federal Reserve and the University of California at Berkeley's Haas School of Business wrote that the nonbank sector “in aggregate appears to have minimal resources to bring to bear in a stress scenario.”

Nancy Wallace, a Berkeley professor and one of the paper's authors, said nonbanks are undercapitalized and rely too much on borrowed money. Being able to access credit lines from Freddie or Fannie wouldn't solve that problem, she said.

“Fannie and Freddie should not be in the business of that kind of lending,” Wallace said.

The Federal Housing Finance Agency, which regulates Fannie and Freddie, approved Freddie's request to provide financing to nonbanks. In its list of 2018 goals for the companies, the FHFA said they should find ways to support mortgage-servicing liquidity.
Renee Schultz, Fannie's senior vice president for capital markets, said Fannie is not planning a similar program to Freddie.

“We think there's plenty of private capital out there for financing of servicing rights,” Schultz said.

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