The contracts outsource custody & servicing,
but the risks & liabilities still remain yours.

Yes, unless it is an agency form. Fannie Mae custody runs on its Master Custodial Agreement, Form 2017, and Freddie Mac’s runs on its Tri-Party Agreement. Every private custodial, bailee, subservicing, and interim servicing contract is drafted by one party and can be negotiated by the other, and in a published 2023 federal decision, one liability clause in a subservicing agreement ended a $38 million servicing claim.

A document custodian takes custody of the original note and the other collateral documents, certifies that they conform to the investor’s or agency’s requirements, and releases them only on a written request. Fannie Mae holds the seller/servicer responsible “for all losses incurred by Fannie Mae because the document custodian it selected failed to perform its fiduciary responsibilities.”

A tri-party custody agreement is a contract among a member bank, its FHLBank, and a document custodian under which the custodian holds the member’s pledged mortgage files for the FHLBank’s benefit and releases nothing without its consent. Freddie Mac uses the same phrase, “Tri-Party Agreement,” for its own custody contract among Freddie Mac, the seller/servicer, and the custodian, so the first question is which one the counterparty means.

A bailee letter is a warehouse lender’s notice that travels with a note to a custodian or investor, stating that the note is pledged to the lender and is held by the recipient as bailee until the lender is paid or the note is returned (Fannie Mae C1-2-05). Written into the custody agreement, it also lets loan sets sell without assigning the custody agreement itself.

The named servicer is. Fannie Mae’s master servicer “remains fully liable to Fannie Mae for the performance of all servicing obligations” even when the subservicing is approved, and Ginnie Mae “may attribute to the Issuer any act by the Issuer’s subcontract servicer.” The subservicing agreement decides who funds that liability between the two.

The master servicer is the party under contract with the investor or agency, and the subservicer performs the day-to-day servicing on its behalf. Fannie Mae requires both to be approved servicers in good standing and requires the subservicing agreement to acknowledge Fannie Mae’s right to rescind its recognition of the arrangement.

Usually yes, on the notice and terms the subservicing agreement sets, and the cost is the deboarding or termination fee the agreement defines, plus transfer costs and any unpaid fees and advances. Filed agreements define a deboarding fee payable “in connection with the transfer of the servicing of a Mortgage Loan from Subservicer to a successor . . . .” Fannie Mae needs prior written consent for any transfer “involving a subservicer,” requested at least 30 days before a subservicing transfer and 60 days before a servicing transfer.

Yes. The subservicing fee, term, termination cost, and change-of-control rights are inputs to the servicing’s value and to its eligibility as collateral. FHFA lists “cost to service” among MSR valuation assumptions, MSR credit facilities condition eligibility on an approved subservicer under an acknowledgment agreement, and one servicing agreement’s valuation clause turned a negative servicing-rights value into a payment owed by the servicer. Goldsmith Associates analyzes the subservicing agreement the way a buyer, a lender, and the agency will.

An interim servicing agreement keeps the seller servicing a sold loan from the sale date until the servicing transfer date, on terms the buyer usually drafts. The transfer date matters because the outgoing servicer generally must notify borrowers “not less than 15 days before the effective date” and the new servicer “not more than 15 days after,” and for 60 days a payment sent to the old servicer may not be treated as late (Regulation X, 12 CFR 1024.33).

The loans stay yours and the agreement usually stays in force, but a change of control usually triggers your consent or termination rights and needs the agency’s approval. Fannie Mae requires prior written consent for transfers “resulting from a change in the servicer’s corporate ownership or structure.” A corporate sale is not itself a servicing transfer, so the file, the cash, and the borrower stay where they are until one occurs.

A subservicing agreement should fix the scope the subservicer is staffing, the fee schedule it invoices against, the timing of advance reimbursement, the owner’s duty to deliver a clean boarding file, and an indemnity that stops at losses the subservicer caused. Filed agreements place “the full risk of ownership on all Servicing Advances” on the owner and limit the subservicer’s exposure to failures of its own. Goldsmith Associates represents subservicers on the same agreements it negotiates for owners.

Goldsmith Associates is a Dallas law firm for mortgage banking and secondary market transactions, with 871+ closed deals. It negotiates custodial, tri-party, bailee, subservicing, and interim servicing agreements for investors, aggregators, banks, MSR owners, and warehouse lenders, and counsels subservicers under the same agreements. Jason Goldsmith, founder and Managing Member, leads the practice and can be reached at 833-4-GOLDSMITH or info@goldsmithpllc.com.