Fannie Mae's PR department might contend that the GSE isn't in the business of servicing loans, but everyone in the mortgage business knows that such a statement is, shall we say, a misnomer. The government-controlled secondary market giant—as a technical matter—owns the servicing rights to every loan it guarantees, but it's the GSE seller/servicer that owns the “contract” to process those loans.

The GSE might contend that it has no play in MSRs, but even its own recent 10-Q statement admits, “We (Fannie) agreed to purchase from Bank of America NA the mortgage servicing rights associated with up to $74 billion in unpaid principal balance of mortgage loans in our single-family guaranty book of business...”

So, there you have it. Fannie may not be the actual processor of residential loans, but it is now the proud owner of a big fat MSR contract. As you may've read in past columns, it's no secret which subservicers have been hired by the GSE to do the grunt work on the B of A package and other assignments: Green Tree, Nationstar Mortgage and Seterus Inc., the fast-growing loan processing division of IBM.

As for how much Fannie paid B of A for the $74 billion of MSRs, that's still a national mystery. The bank, the GSE, and the latter's regulator have all refused to disclose that number.

As for why Fannie has “force-placed” MSRs—or even bought a portfolio, as was the case with B of A—the reason is simple. Since the housing bust, the GSE has been none too pleased with the loss mitigation work of several of its largest seller/servicers and thus yanked the rights.

But what bothers many people in the industry is the lack of disclosure. OK, so Fannie, as per its right, is yanking MSR contracts, but is it providing the (now former) servicer with any remuneration?

Servicing executives and advisors—all speaking under the condition that their names not be published—say that over the past two years Fannie has force-placed upwards of 14 MSR portfolios. “These have all been behind-closed-doors deals,” said one servicing advisor who has done consulting work for the GSE.

But has any taxpayer money been used to fund the GSE's strategy? Some argue that Fannie is (ultimately) using cash provided by taxpayers to fund its management of MSRs, but there will be in upside, eventually. “You can't characterize this as buying servicing,” said one M&A specialist. “They're being creative—when it comes to the MSRs, they're acting as a financier.”

In other words, one role of a servicer is to pass on the principal and interest to the note holder. When a subservicer is working for Fannie—Nationstar, for example—it handles that task. But since the contractor doesn't own the servicing rights it relies on the GSE to provide it with servicing advances, or so it's been explained to me.

It's also been suggested that in some cases Fannie may be financing the sale of MSRs to its contractor. Since the GSE won't comment on such things—nor will its regulator—the whole situation is fuzzy. (This fall our sister publication American Banker filed a Freedom of Information Act request with the FHFA on Fannie's purchase of MSRs but was turned down, but not before telling the newspaper that it has 381 documents related to its request.)

But the bottom line is this: Fannie fully expects specialty servicers the likes of Nationstar, Seterus, Green Tree and Residential Credit Solutions to greatly improve delinquencies and modifications on MSRs tied to loans it guarantees. “They're spending money now to save a lot later,” said one broker. And as Fannie spokeswoman Amy Bonitatibus put it: “We're trying to minimize credit losses.” (Rumor has it that Fannie is paying upwards of 60 to 80 basis points for processing problem loans, compared to the standard fee of 23 bps for performing product.)

If Fannie's subservicers are successful, the GSE might score points with an angry Congress that would like nothing more than to kill the company. But another question must be asked as well: Why is Fannie so hell bent on changing the GSE servicing compensation structure, especially since it's trying to control more of its own MSRs? Is this self-serving or a smart business move?

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