ASF panel asks why mortgage servicers risk so much, yet make so little
Reforming mortgage servicing rights and due compensation is a recent mandate from the Federal Housing Finance Agency. The order, directed by Fannie Mae and Freddie Mac, is to work on a new payment structure for mortgage servicers in the future. A panel at the American Securitization Forum conference Monday in Orlando agreed now is a good time to change the fee structure, because simply put, it seems unfair. Moderator Thomas Hiner, a partner at Hunton & Williams law firm remarked that the entire securitization model is dependent on an operational mortgage servicing model. Yet the challenge is not just in repairing securitization to make for a more competitive mortgage finance market, but also in making sure MSR reform doesn't kill the mortgage servicing business in the revamp. James Davis, executive vice president of American Home Mortgage Servicing, took the point further, arguing that current fees were out of touch. Reform should be done in a way that also does not discourage people from getting into mortgage servicing, he said. "If there is a decrease in compensation there should be a decrease in responsibility. Repurchase risk, for example, can be removed," Davis said. "If the margins get too thin, there will be no reason for people to be in the business. These mortgage servicing agreements, when originally created, did not contemplate the environment of now." Garry Cipponeri, vice president of JPMorgan Chase (JPM), said there are a multitude of models out there proposing a solution, but new regulation may make it too costly. Under Basel 3, due to be implemented in 2014, MSRs will not count as common equity for Tier 1 capital. As one panelist put it, it makes mortgage servicing a dead business full of dead assets. The result may serve to whittle down the competition further. "Expanding the universe of servicers away from too few to compete is a great cause," Cipponeri said, "but if you can't get someone to take over MSRs for 25 basis points, how will they get it for 6 basis points," as one proposal states. The best solution is likely in the form of a sliding scale, said Theodore Tozer, president of Ginnie Mae. "If costs are constant, compensation should be constant. If costs are variable, then compensation should be variable," Tozer said. Darius Kingsley, deputy chief of the Homeownership Preservation Office at the Treasury, said his department realized early on that it wouldn't be enough to come out with a single standard of mortgage servicing rights when it created HAMP. "We do need to incentivize servicers to look at portfolios and make the right decisions to modify," he said. Mani Sabapathi, principal at Prudential Investment Management, brought the investors perspective, noting that compensation needs to be aligned with responsibilities. One panelist wondered why mortgage servicers take on credit risk in the first place, considering that they did not originate the mortgage. Making mortgage servicers responsible for repurchases seemed to him to be "unfair." Sabapathi added that he was not opposed to changing mortgage servicer responsibilities and that he sympathized. "We've seen issues where mortgages are very delinquent and therefore, hard to transfer in such a way that servicers can make sure that costs are aligned," he said. "So it makes sense to have a smaller fee for better loans and higher fees for more troubled loans." "It's a challenge for servicers to be aligned with the investors," Sabapathi said. "But what you don't want to do is create more complexity. With public policy evolving now, we don't know what housing policy we will see five years from now." Write to Jacob Gaffney. Follow him on Twitter @JacobGaffney. The author holds no relevant investments.