As federal regulators consider establishing a national standard for how mortgages are serviced, Amherst Securities Group proposes balancing the fee structure for performing and nonperforming loans. In January, the Federal Housing Finance Agency announced an initiative with Fannie Mae, Freddie Mac and the Department of Housing and Urban Development to establish a new compensation structure for mortgage servicers. The main goal seems to be striking an alignment in the cost structure for these companies. Amherst said that is best done by lowering fees on performing loans and raising fees on nonperforming loans. “There is widespread awareness that the current system (in which a minimum servicing fee is part of the mortgage rate) was not designed for current market conditions,” Amherst said. “This minimum servicing fee is far too high for performing loans, and way too low for non-performing loans.” For instance, if a servicer is paid 25 basis points to service a $250,000 mortgage, the servicer can expect $625 in income per year, Amherst said. But when analysts spoke to one servicer with an undisclosed company, that employee estimated that the cost of servicing that loan if it is performing was at $48 per year, compared to a $900 per year in cost to service a nonperforming one. That 25 bps fee has been in place since the mid-1980s, and while average loan sizes have increased over time and default rates spiked during the collapse of the housing bubble in 2007, the incentive to properly service troubled mortgages began to vanish. At its summit on the future of mortgage servicing, the Mortgage Bankers Association released research showing that total revenue reaching servicers is at an all-time low. This means higher rates for borrowers who do make their payments, analysts said. Amherst said that’s not the end of the fee problems. New Basel III requirements allow the mortgage servicing rights to be recognized only up to 10% of the common equity component of Tier 1 capital. Any MSRs over that amount will be deducted from capital. The MBA sent a letter to regulators in October stating that 56 banks already exceeded the 10% limit. Amherst said there are three proposals on the table. The first is that minimum servicing fees will be dropped to 5 bps or lower for performing loans while hiking fees for nonperforming ones. The second cuts performing loan fees in half, and the third places the servicing as a percentage of the principal and interest reimbursements the servicer receives after advancing pass-throughs to investors. While it’s still unclear whether or not changing these fees would keep mortgage rates from rising, Amherst did note fears from investors over prepayment fees and whether or not servicers would have incentives to help borrowers in imminent default. Amherst suggested giving the GSE the ability to take bids on these loans, not necessarily to choose the lowest bidder but the company that has proven to do a good job in mitigating future losses. “Thus, if one of the special servicers does an unusually good job, a GSE could chose to place more business there,” Amherst said. Such an overhaul to a system that has been in place for decades will create commotion in all levels of the mortgage space, from origination through the secondary market. While regulators and lawmakers call for action now, the FHFA warned in its initial announcement that no concrete rules should be expected until the summer of 2012. Write to Jon Prior. Follow him on Twitter: @JonAPrior