What to Negotiate in a Subservicing Agreement

Negotiate 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, and 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 worth fighting over are the ones that answer it.

Why does the agency’s position control the drafting?

Because it is written in terms that leave no room. Fannie Mae: “Even 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 Fannie Mae may enforce against the master servicer “whether such breach was caused by the master servicer or by the subservicer.” Freddie Mac makes master servicer and servicing agent jointly and severally liable, and keeps the master servicer “responsible and liable to Freddie Mac for all Servicing requirements and all representations and warranties.” Ginnie Mae: the Issuer “remains fully responsible for the performance of any servicing functions that have been delegated to a subservicer,” and is liable for the subservicer’s representations or omissions. Some Ginnie Mae functions cannot be delegated at all — withdrawing funds from a P&I custodial account, signing certifications to Ginnie Mae other than the form HUD-11710D data and certification, and withdrawing mortgage documents from the document custodian.

What does the indemnity have to reach?

Agency-shaped loss, not ordinary contract damages. The exposure is repurchase demands, compensatory fees, agency indemnification claims, and remediation cost — none of which reads naturally as “direct damages,” and all of which can exceed an annual-fee-based cap. Filed forms show the drafting is available: one indemnity runs to loss “directly or indirectly resulting from” the subservicer’s failure to perform, breach of representation, or failure to transfer files promptly on termination, and survives termination. Ask for consequential-damage carve-backs for agency and regulatory claims, defense obligations rather than reimbursement, and a cap that sits above a plausible repurchase pool.

What makes a performance schedule enforceable rather than decorative?

A consequence. The obligation drafts cleanly — one filed agreement states the subservicer “shall at all times meet or exceed the performance standards attached hereto as Exhibit 8”, and must correct material breaches “without charge” and “promptly and as soon as practicable”. That is the floor, not the deal. Ask for fee credits that attach automatically at defined thresholds, a cure period stated in days rather than “promptly,” a written remediation plan, and termination for cause on repeated misses in a rolling window. Metrics without a remedy are a reporting exercise.

What audit and access rights should you insist on?

Access to the compliance record, not the loan file. A filed agreement extends inspection to policies, procedures, training, compliance testing results, call recordings, and “summaries of internal and external audit reports,” and opens them to the servicer’s auditors and to “investor, agency, federal or state agencies having jurisdiction over” the servicer. Push further; the agencies assume you will. Fannie Mae requires the subservicer to disclose its Fannie Mae assessments or reviews to the master servicer on request, and Freddie Mac requires a documented oversight and surveillance program plus a monthly report, by the 20th, of any notice of default under the subservicing agreement. Ask for the subservicer’s regulator-facing material — exam findings, MRAs, consent-order status — on a defined cadence, not on request.

Why does the exit have to be negotiated at signing?

Because leverage is gone once you want out. One filed agreement lets the servicer move loans to a third party on 90 days’ notice, but makes the servicer pay “applicable Deboarding Fees, Transfer Costs and any accrued and unpaid Subservicing Fees, Servicing Advances, Pass-Through Expenses” at transfer. Cap or schedule those fees, specify a fully indexed electronic delivery standard, and name an industry file standard — Freddie Mac points servicing agents to the MISMO Servicing Transfer Catalog. Draw termination for convenience on short notice with no penalty beyond accrued fees, and confirm the tail: indemnity, confidentiality, and records obligations survive, and cooperation runs until de-boarding completes. Agency action can also end the agreement outside your control: if Freddie Mac suspends or disqualifies the master servicer, the subservicing agreement “shall, without notice, demand or other action, immediately terminate,” and Freddie Mac may transfer servicing without regard to purported rights of first offer or first refusal.

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

Expect the subservicer to disclaim its own funds. A filed agreement provides that “in no event shall the Subservicer be obligated to advance from its own funds” monthly advances or guaranty fees, and gives it a cost-of-carry fee if it does. Fannie Mae leaves you no cushion: the master servicer must remit on time “regardless of any arrangement” with the subservicer, and must advance if the subservicer remits later. Negotiate the notice window, the reimbursement waterfall, and who bears a nonrecoverable determination. On borrower-facing failures, Regulation X runs against the servicer of record: five business days to acknowledge a notice of error, 30 to respond, seven for a payoff error, plus policies reasonably designed to oversee service providers. Allocate error-resolution ownership expressly, with turn times that let you meet the regulation rather than match it.

Practitioner takeaway. Draft the subservicing agreement as a funding-and-cure allocation for a liability the agency will never let you transfer. If the indemnity does not reach repurchase and compensatory-fee loss, the SLA carries no remedy, and the de-boarding fee is undefined, the agreement has documented the relationship without protecting the position.