What Does a Subservicing Agreement Decide?

A subservicing agreement decides the allocation of a liability you cannot delegate. Fannie Mae, Freddie Mac, and Ginnie Mae each hold the named servicer or Issuer fully responsible for servicing performance regardless of who performs it. Freddie Mac’s Guide supersedes any inconsistent provision in the subservicing agreement. The document does not move the exposure. It decides who funds, cures, and reimburses a failure the agency will charge to you, so the clauses that matter are the ones that answer that question.

This article reads the three agency texts and one modern filed agreement for what each clause does when the failure arrives. The agency texts are Fannie Mae Servicing Guide A2-1-07, Freddie Mac Guide Sections 8102.1 and 8102.2, and Chapter 4 of the Ginnie Mae Mortgage-Backed Securities (MBS) Guide. Regulation X, 12 CFR part 1024, supplies the borrower-facing clock, service-provider oversight, and transfers. The filed agreement is a subservicing agreement between a national subservicer and the servicing affiliate of a mortgage servicing rights (MSR) investor. It was filed with the Securities and Exchange Commission (SEC) and has been amended several times since it was signed. It is not an agency form. It covers loans serviced for securitization trusts and other private investors, and its definition of investor excludes the agencies. It sends the loans it recaptures, whose servicing rights are agency-type, to a separate agreement we did not read. We use it for its mechanics, among them the clauses the Fannie Mae and Freddie Mac texts themselves refer to, and we read it as amended and do not name either party.

Why does the agency’s position control the drafting?

The agency’s position controls the drafting because each agency writes the named servicer’s liability in terms that leave the agreement nothing to move. Fannie Mae Servicing Guide A2-1-07 provides that “[e]ven if a subservicing arrangement is known, approved of, or consented to by Fannie Mae, the master servicer remains fully liable to Fannie Mae for the performance of all servicing obligations,” and that Fannie Mae may enforce its remedies against the master servicer “whether such breach was caused by the master servicer or by the subservicer.” The same topic requires the written agreement to acknowledge “Fannie Mae’s right to rescind its recognition of the subservicing arrangement if Fannie Mae decides to transfer the master servicer’s portfolio for any reason,” and it provides that both parties’ rights to the servicing fee and the subservicing fee “will be terminated if Fannie Mae transfers the servicing portfolio for any reason.”

Freddie Mac Guide Section 8102.1 makes the master servicer and the servicing agent “jointly and severally liable to Freddie Mac,” keeps the master servicer “responsible and liable to Freddie Mac for all Servicing requirements and all representations and warranties,” and provides that the Guide “shall supersede any inconsistent requirement or provision set forth in the Subservicing Agreement.” The servicing agent’s rights to perform and to be paid “are subject to extinguishment at any time.” One parenthetical in that sentence is the only right Freddie Mac exempts from extinguishment: the extinguishment reaches the agent’s rights to perform and be compensated “(but not the Servicing Agent’s indemnification rights, if any, against the Master Servicer).” Section 8102.1 ends the agreement “without notice, demand or other action” when Freddie Mac suspends or disqualifies the master servicer or terminates its servicing contract, and, as to Freddie Mac loans, when it suspends, disqualifies, or terminates the agent as a Freddie Mac servicer. Whether an accrued indemnity outlives that end is a question the Guide leaves to the agreement.

Ginnie Mae says the same thing in the Issuer’s vocabulary. Under MBS Guide Chapter 4, Part 2, the Issuer “remains fully responsible for the performance of any servicing functions that have been delegated to a subservicer” and “is liable to Ginnie Mae for any representations or omissions submitted on its behalf by a subservicer.” Three functions cannot be delegated under both Ginnie Mae programs. They are withdrawal of funds from a principal and interest custodial account, signing of certifications to Ginnie Mae (the Monthly Reporting Certification excepted, on a condition), and withdrawal of documents from the document custodian. The Ginnie Mae I program lists five more, one a repeat of the custodial-account bar, among them the signing of checks and remittance advice to security holders. The approval runs on the Master Servicing Agreement, the Department of Housing and Urban Development (HUD) form HUD-11707, which “may not be altered,” and any separate agreement between Issuer and subservicer “will be subordinate to the applicable Guaranty Agreement and this Guide.” The default trap is an agreement drafted as though the subservicer were the party at risk. It is not. The agency will look to you, and the only question the agreement can answer is what you then recover.

What does the indemnity reach?

The indemnity reaches the agency’s charge only as far as the agreement’s own words carry it. The loss the agency charges you is, in our view, not ordinary contract damages, and it arrives as your own liability for a breach the subservicer caused. The filed agreement shows how far its indemnity goes and where it stops. The subservicer indemnifies against “any and all Losses resulting from or arising out of” its failure to perform its covenants, “including without limitation the failure to comply following the applicable Transfer Date with any provisions under any Servicing Agreement relating to the servicing or Subservicing of the related Mortgage Loans,” and the loss definition includes “penalties.” The indemnifying party “shall assume the defense of any such claim,” and the indemnities “shall survive for five (5) years following the termination of this Agreement.”

One feature of that agreement shows where the reach is negotiated rather than assumed. As originally executed, the indemnity named compensatory fees in terms, though its defined term reached only fees imposed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the Department of Agriculture (USDA) for failures under their guidelines, and only “to the extent and amount such Compensatory Fee or other fee, penalty or curtailment is attributable to the Subservicer.” A later amendment replaced that subsection, and the indemnity as amended carries no compensatory-fee clause at all. One large money term in the agreement is a payment for servicing rights lost when an investor terminates for a cause the indemnity covers, other than a delinquency or loss trigger. “Investor” is a term this agreement defines to exclude the agencies.

The agencies supply the other half of the picture. Freddie Mac’s servicing agent is jointly and severally liable to Freddie Mac for the master servicer’s failures that the agent caused, and Fannie Mae reserves the right to enforce against the subservicer directly. Neither provision read here gives the master servicer a recovery against the subservicer. Recovery between the two private parties is the agreement’s job alone, and at Freddie Mac the agreement is not only theirs to enforce. Section 8102.1 makes Freddie Mac “a third-party beneficiary of the Subservicing Agreement with respect to the rights of the Master Servicer and the duties and obligations owed by the Servicing Agent under the Subservicing Agreement with respect to the Mortgages serviced for Freddie Mac,” and it has the master servicer indemnify Freddie Mac for loss incurred “as a direct or indirect consequence of the Servicing Agent’s bankruptcy, insolvency or failure to comply with any of the requirements of the Purchase Documents.” The default trap is an indemnity that reads naturally only for ordinary contract damages. We have written on what the repurchase alternatives at Fannie Mae and Freddie Mac are and where the two differ, which is the shape the loss takes when it arrives. Whether a given indemnity reaches it turns on the product mix, on which agency’s fee regime applies, and on what the agreement on the table already says.

What does a performance schedule do on a miss?

What a performance schedule does on a miss is what the agreement says happens then, and the filed agreement answers that in its exhibit, in its body, and in its termination triggers. It attaches its service level agreements (SLAs) as an exhibit; the thresholds are redacted and the mechanics are not. Penalties net against incentives and are capped against the monthly fee, penalties are conditioned, waiver is by mutual agreement in stated circumstances, and a miss requires a written explanation and a proposed remedy.

The schedule also feeds termination: performance triggers, most of them measured over two consecutive quarters, are termination events, and one amendment records that the triggers had been suspended by the parties and reinstates them. Fannie Mae assumes the schedule exists: A2-1-07 requires the subservicer to “ensure it has the necessary resources to appropriately support the subserviced portfolios and to govern the required interaction with the master servicer and service level agreements,” and requires the master servicer to “maintain policies and procedures to evaluate the subservicer’s compliance and performance.” The default trap is a metric with a reporting duty and no computed consequence. Whether a schedule bites turns on the measured population’s size, on the seasonality the thresholds assume, on who picked the vendors the waiver protects, and on what happens at the cap.

What do the audit and access rights reach?

The audit and access rights reach, or fail to reach, the compliance record the agencies test you on, and the question is whether the agreement gets you to it. Fannie Mae and Freddie Mac assume you have them, and Regulation X requires policies that use them. Ginnie Mae’s Chapter 4 says nothing about audit rights and leaves the Issuer fully responsible. Fannie Mae requires the master servicer to “maintain policies and procedures for selecting and assessing a subservicer,” to make them available to Fannie Mae on request, and, with the subservicer, to provide “copies of the subservicing agreement and the master servicer’s audits and QC reviews of the subservicer’s performance under the subservicing arrangement upon request from Fannie Mae.” The subservicer must “disclose any and all Fannie Mae assessments or reviews to the master servicer upon request by the master servicer.” Freddie Mac requires the master servicer to “establish an oversight and surveillance program to monitor its Servicing Agent’s compliance,” to employ “a seasoned Mortgage Servicing executive and experienced Mortgage Servicing staff to oversee the activities of the Servicing Agent,” and to report to Freddie Mac by the 20th of each month “[a]ny notice of default or event of default under the Subservicing Agreement received or sent by the Master Servicer.” Regulation X, 12 CFR 1024.38(b)(3), requires policies reasonably designed to “[f]acilitate periodic reviews of service providers, including by providing appropriate servicer personnel with documents and information necessary to audit compliance by service providers with the servicer’s contractual obligations and applicable law.”

The filed agreement shows the width a negotiated clause can take. Access reaches the subservicer’s platform, files, personnel, and records, with representatives who compete with the subservicer excluded; the subservicer delivers audit results and a controls report; and examination cost is allocated in both directions.

The default trap is an agreement that gets you the loan file and nothing else. Even this agreement makes vendor information “subject to the requirements and limitations of the contractual relationship between the Subservicer and that party.” What a given clause needs turns on who examines you, on what you certify each year, and on what the subservicer’s regulator-facing record already shows.

What does the exit cost?

The exit costs what the agreement says it costs, and the agency can end the arrangement on its own clock without asking either party. The filed agreement provides that termination “shall not be effective until a successor servicer or subservicer has been appointed” and “a servicing transfer of all the Mortgage Loans and REO Properties subserviced pursuant to this Agreement has been completed in accordance with Applicable Requirements.” The agreement prices the exit by the reason it ended, and its amendments repriced it more than once.

The agency can also end it. Under Freddie Mac Guide Section 8102.1, if Freddie Mac suspends or disqualifies the master servicer or terminates its servicing contract, the subservicing agreement “shall, without notice, demand or other action, immediately terminate and be of no further force and effect,” and Freddie Mac may transfer the servicing “without regard to any provisions set forth in a Subservicing Agreement purporting to restrict Freddie Mac’s rights, including, without limitation, any purported rights of first offer, rights of first refusal or other similar rights.” Freddie Mac may then “contract separately with the Servicing Agent” for the loans, and the master servicer must report any termination or expiration of the agreement within one business day. Fannie Mae reserves the right to rescind recognition of the arrangement, ends both parties’ fee rights on a portfolio transfer, and requires its prior written consent for every transfer involving a subservicer, including “from one subservicer to another.” Section 8102.2 then sets transfer mechanics that apply whatever the agreement says: the outgoing servicer delivers the mortgage file, payment history, and correspondence “[n]o later than 30 days after” the successor takes over, and gives each borrower written notice “at least 15 days before the first payment is due” to the successor. Freddie Mac’s subservicing transfer checklist adds that servicing agents “should review the Mortgage Industry Standards Maintenance Organization (MISMO) Servicing Transfer Catalog (MSTC) and adopt its industry-standard templates and best practices,” and Regulation X treats a subservicer as a transferor or transferee servicer for the transfer-of-information policies 12 CFR 1024.38(b)(4) requires. We have written on what an acknowledgment agreement gives the agency if the servicer defaults, where the same reserved position reaches a lender. The default trap is an exit priced after the relationship has soured. What the exit costs turns on the term structure, on who funds the advances, on the portfolio’s mix, and on who is available to take it.

Who funds advances, and who eats a borrower-facing failure?

Advances are funded by the named servicer unless the agreement moves the funding to the subservicer, and a borrower-facing failure is eaten by whichever party the agreement leaves holding the Regulation X clock, which the regulation hangs on “a servicer,” a term the subpart’s definitions give the subservicer in terms, and no provision in the Regulation X sections read here allocates the clock between the two parties. Fannie Mae requires the master servicer to remit “regardless of any arrangement the master servicer and subservicer have to accept collections from the subservicer at a later date,” and if the subservicer remits later, “the master servicer must advance any funds necessary.” Ginnie Mae requires the Issuer to “use its own resources to cover shortfalls in amounts due to security holders or to Ginnie Mae resulting from insufficient collections on the mortgage collateral,” while permitting the subservicer “to supply its own funds to the Issuer” for advances and uncovered foreclosure losses, and reserving the right to demand disclosure of “the frequency, duration, amount, and purpose for such advances.” The filed agreement splits advance funding between the parties under an advance policy and a dispute schedule the filing redacts, and puts some nonrecoverable advances on the subservicer.

The borrower’s clock is not negotiable; which party eats a miss is. Under 12 CFR 1024.35, a servicer acknowledges a notice of error “[w]ithin five days (excluding legal public holidays, Saturdays, and Sundays)” of receipt, responds to a payoff-balance error within seven, and to most others within 30, with one 15-day extension on written notice for errors other than payoff-balance and foreclosure-timing errors. Section 1024.35 imposes every one of those duties on “a servicer” and nowhere mentions a subservicer, and the subpart’s definitions in Section 1024.31 put the subservicer inside the term and define the master servicer by the right it owns: a subservicer “means a servicer that does not own the right to perform servicing, but that performs servicing on behalf of the master servicer,” and a master servicer is “the owner of the right to perform servicing.” Nothing in either section allocates the duty between them. The filed agreement puts compliance with “Applicable Requirements,” a defined term that reaches the Consumer Financial Protection Bureau (CFPB), on the subservicer. It requires a report on notices of error and information requests on a reporting schedule and states no turn time of its own. The default trap is an agreement that routes every borrower inquiry to the subservicer while the deadline stays yours. Our article on how to read an acknowledgment agreement covers another document whose timing the agency sets. Who carries the advance and eats a missed deadline turns on which party the borrower sees as servicer, on who finances the advances, on who calls an advance nonrecoverable, and on the dispute terms agreed.

The agreement allocates a liability it cannot move

A subservicing agreement is a funding-and-cure allocation for a liability the agency will never let you transfer, and that is how to read every clause in it. An agreement that allocates none of it has documented the relationship and protected nothing. Which allocation is missing in a given draft turns on the agency, the product mix, the subservicer’s bargaining power, and what the form on the table already says, and that is the work.