In 2018, Joe Nocera interviewed me on nonbank mortgage servicers, the risks they ran, and the rout that might result.  In response, he and I received furious calls, including one from a top nonbank executive proclaiming that I had badly misstated his company’s resilience.  I went to see how much capital his company posted, but couldn’t find it because the company is privately held.  Questioned on this critical point, the executive stoutly insisted that his mortgage firm had loan-loss reserves and was thus well-capitalized.  Questioned about the difference between loan-loss reserves (then set under the generous incurred-loss methodology) and equity capital, the officer gave no ground beyond complaining that bank regulation is too literal-minded.  Mortgage servicing isn’t the only sector that ran afoul of bank regulators by refusing to accept even a bit of post-crisis regulation, but so far it’s about the only one not yet bailed out – oops, given liquidity support – by the Fed.  Succor may soon come also for nonbank servicers, but servicers need to know why it’s taken so long now if they hope to get funds flowing while they’re still able to receive them.

When the Financial Stability Oversight Council late last year presaged the nonbank-servicer systemic risk now upon us, vilification was again in vogue.  Now, as FHFA Director Calabria rebuffs requests for a servicer liquidity facility, he is the target of the type of personal attack President Trump has sadly made de rigueur.  Mr. Calabria is wrong about servicer liquidity under current stresses, but he’s right in one key respect:  had sensible regulation been accepted in the sunshine, nonbanks wouldn’t now need bomb-shelter protection from this storm.

In fact, if nonbank servicers had been more reasonable, they now would be far more secure.  The pandemic is a stress event like none other, but advance prudential regulation would have had two beneficial results for this sector, not to mention homeowners, taxpayers, financial stability, and broader economic resilience.

First to what regulatory reason then would have meant for resilient mortgage servicing now.  It seems incontrovertible even though nonbanks contested it that servicers with more capital would have had buffers to stave off insolvency.  Because capital engenders liquidity, better-capitalized servicers would also have been more liquid and thus even stronger.  Beyond these time-worn – if not always time-honored – lessons, there are other benefits of reasonable capital and liquidity regulation:  reduced opportunities for the regulatory arbitrage that angers competitors and the regulators that listen to them.  Some regulation could well have credibly countered demands for still more.  In short, give an inch, gain a yard.

Second, there’s a reason even the most speculative financial-market sectors are getting rescued and servicers are still on the sidelines:  the Fed listened not just to its bankers, but also to its own researchers, some of them very senior within the Fed’s hierarchy.  FSOC’s 2019 report was just the latest in a series of critiques directly or indirectly from the Fed.  Sometimes, criticism is warranted, but even if it isn’t, that which comes from influential agencies needs to be objectively considered, not insulted.

To be sure, nonbank servicers weren’t the only sector that beat back Fed regulatory recommendations.  Money-market funds, leveraged lenders, and other nonbanks also discounted the Fed and its researchers, but none did so with the vehemence and personal attacks evident ahead of the crisis that then and even now characterize some in the servicing sector.  An official battered by invective is not an official eager to change his mind no matter any new facts arguing for action.

After the COVID smoke clears, asset managers and nonbank lenders will all face a comeuppance due to the rescues the Fed afforded.  However, they’ll live to fight on.  If nonbank servicers want to join these battered survivors in the post-2020 financial market, they need to make clear not just why they need a liquidity window, but also what they’ll do to deserve it.  Thinking about a new liquidity facility is a lot like thinking about getting DPC financing – borrowers have to be nice to their bankers and understand that new money comes with new conditions.