Mortgage servicers to FHFA: Don't mess with compensation model
Mortgage servicing compensation should remain the same or move toward a reserve account scenario, according to the majority of public comments received by the Federal Housing Finance Agency on proposed plans to overhaul servicing payments.
Of the 161 public comments the agency received, few wanted changes, said Bryan Heft, senior manager at PricewaterhouseCoopers, while speaking at the Mortgage Bankers Association secondary conference under way in New York City.
Last year, the FHFA and the Department of Housing and Urban Development launched an effort to improve mortgage servicing for borrowers while decreasing financial risks posed to servicers. The agencies sought input on changing the mortgage servicing compensation structure to improve management of nonperforming loans and still provide liquidity to the To Be Announced mortgage securities market.
But the industry staunchly opposes the proposed compensation changes, leading some to wonder if the FHFA might ultimately scrap the plan. Heft noted that dialogue between the FHFA and the industry is ongoing despite the end of the comment period.
Although most oppose any change, according to comments the FHFA received, some followed the MBA's lead in saying if the FHFA decided adjustments would be made, the most palatable would be a cash reserve structure where part of the existing servicing fees are deferred as a cash reserve to cover servicing costs for catastrophic economic and default situations.
Mortgage servicers are currently paid the same regardless of performance — a 25-basis-point minimum servicing fee paid on Fannie Mae or Freddie Mac-backed loans — but the cost of servicing a nonperforming loan may be much more expensive than servicing a performing loan.
Heft said many of the letter writers requested additional analysis before any decision is made.
The current model provides a competitive advantage that benefits market participants who have the ability and desire to hold the mortgage servicing rights asset. But he also said Basel III and capital requirement changes pose a problem to market participants with high MSR concentration.
Edward DeMarco, acting head of the FHFA, said in an April speech to the Boston Security Analysts Society that both mortgage servicing standards and mortgage servicing compensation remain on the agency's mind.
The country needs a "servicing compensation structure that promotes competition for, rather than concentration of, mortgage servicing," he said. "Such a structure would take full account of mortgage servicers’ costs and requirements, and consider the appropriate interaction between origination and servicing revenue. "