Add this to the list of reasons banks are losing their appetite for servicing the mortgages they underwrite: Bank of America (BAC), Citigroup (NYSE: C) and JPMorgan Chase (JPM) all flunked Fannie Mae's test of mortgage servicers, failing to meet even the minimum requirements for performance in 2012, according to a report Fannie released Tuesday.

Wells Fargo (WFC) and Ally Bank both received the equivalent of a "C" grade, signifying an average level of performance relative to their peers.

Fannie's Star program, now in its second year, was designed to create standards and rank servicers based on their overall performance, customer service and foreclosure prevention efforts.

Seventeen of 38 mortgage servicers received either a three- or four-star rating, though to date no servicer has received the highest rating of five stars. Fannie does not identify or publish the names of servicers that did not meet minimum requirements and instead referred a reporter to a list of peer groups to determine which ones were left out of the ratings.

Banks are increasingly selling mortgage servicing rights as a result of new capital requirements make it much less attractive to keep these rights on their books; requirements imposed by the National Mortgage Settlement have also made the business less attractive. The players taking their place don't have the same access to cheap funding and so are turning to securitization to fund advances. 

The poor performance of the top banks is surprising considering the top five mortgage servicers — B of A, JPMorgan Chase, Citi, Wells Fargo and Ally — each claimed in October that they had met 304 different servicing standards and reforms as part of the $25 billion national settlement with 49 state attorneys general and federal regulators. That settlement was designed to address servicing abuses that led to the robo-signing of foreclosure documents.

Leslie Peeler, Fannie's senior vice president of national servicing, said the Star program was designed "to recognize top performers not to call out," poorer ones. Still, if servicers are rated in the bottom-quartile that "indicates unacceptable performance and Fannie may take action, including implementing improvement plans," Peeler says.

Fannie adopted new rules and remedies in January to address poor-performing servicers but has not released any information on remedial actions it has taken so far, she says. Fannie plans to release some information on the worst-performing servicers when first quarter data is available, she says.


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