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July 2, 2014 – The Federal Housing Finance Agency should provide Fannie Mae and Freddie Mac guidance on how to manage the risks arising from their work with nonbank special servicers, FHFA's Office of Inspector General said in a report issued Tuesday.

In the report, the OIG said FHFA, Fannie Mae and Freddie Mac "have responded well to specific problems at nonbank special servicers." However, it said the agency "has not established a risk management process or overall oversight framework to handle some general risks" such servicers pose.

The OIG noted, for example, that special servicers might purchase rights with borrowed money and have trouble later ensuring timely payments, which in turn would impact the enterprises' timely payment guarantees and reputation for loans they back. The report says that nonbank special servicers, which are not regulated the same way financial institutions are, now hold about $1.4 trillion in mortgage servicing rights out of a nearly $10 trillion market.

Specific recommendations to FHFA include:

• Issue guidance to Fannie and Freddie on the risk management process they should u se to identify and mitigate risks related to nonperformance under contracts the entities have with nonbank special servicers.
• Develop a comprehensive, formal framework to mitigate risks these nonbank entities pose to Fannie and Freddie, including routine FHFA examinations, enterprise reviews, and capacity testing before acquisition of servicing rights.