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July 1 (Bloomberg) -- The regulator of Fannie Mae and Freddie Mac should strengthen its oversight to protect the two companies from risks posed by nonbank mortgage servicers, according to an auditor’s report.

Nonbank servicers’ rapid growth and reliance on short-term financing has left some of them unable to adequately manage loans backed by the two government-sponsored enterprises, the report from the Federal Housing Finance Agency Office of the Inspector General said.

Since Fannie Mae and Freddie Mac back the loans, “such strains can increase credit risk,” the inspector general said in the report released today. “In addition, poor or interrupted servicing -- particularly for vulnerable homeowners with troubled mortgage loans -- can risk the enterprises’ reputation.”

Nonbank companies including Nationstar Mortgage Holdings Inc. and Ocwen Financial Corp. have been handling a growing share of loans backed by government-owned Fannie Mae and Freddie Mac as banks seek to shed the job of collecting mortgage payments and dealing with delinquent borrowers. Unlike banks, the specialty servicers aren’t overseen by a federal regulator responsible for ensuring their financial soundness.

Fannie Mae and Freddie Mac buy mortgages and package them into securities on which they guarantee payments.

Management Failure

The report cited the case of one unnamed firm that acquired rights to manage billions of dollars in loans and then was unable to adequately service them even after the FHFA increased surveillance of its operations. Both Fannie Mae and Freddie Mac required the company to address operational flaws before taking on more servicing work.

The FHFA already is working on new risk-management guidelines for Fannie Mae and Freddie Mac to use in their contracts with nonbank servicers, Nina A. Nichols, acting deputy director at FHFA, said in a written response to the report.

“FHFA concurs that servicing of troubled loans by nonbank servicers may entail operational and financial risks for the enterprises,” Nichols said.

Nonbank servicers have played an important role in handling distressed borrowers during the housing downturn when banks didn’t have the capacity, Andrew Wilson, a spokesman for Fannie Mae, said in an e-mailed statement.

‘Continuous Improvement’

“Specialty servicers have been vital in preventing foreclosures, reducing losses and aiding the housing recovery,” Wilson said. “We are committed to continuous improvement in servicing and we will continue to work with FHFA to monitor all servicers, including the specialty servicers, to ensure they help borrowers and manage our loans effectively.”

Freddie Mac spokesman Tom Fitzgerald said the company actively monitors its servicers.

To contact the reporter on this story: Clea Benson in Washington at

To contact the editors responsible for this story: Maura Reynolds at Anthony Gnoffo, Gregory Mott

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