Mortgage servicers have one warning for the Federal Housing Finance Agency (FHFA) – keep your hands off our compensation methods, you regulatory agency!
As part of a wide-ranging effort by the the FHFA and the Department of Housing and Urban Development (HUD) to improve how mortgage servicing functions for servicers and borrowers, the industry’s method of compensation had been floated as a possible source for reform.
But according to the 161 comments the FHFA received from servicers on the issue, very few are interested in any such change, said Bryan Heft, a senior manager at Price Waterhouse Coopers in comments before the Mortgage Bankers Association secondary conference.
The industry’s resistance is interesting, considering the agencies’ plans primarily involve the economic stability of the industry. Acknowledging that servicers have been hammered in recent years by non-performing loans, aka delinquent mortgages, the FHFA indicated last fall that it was drafting possible compensation methods that did not rely as heavily on regular mortgage payments. As it stands now, servicers are paid the same amount on GSE loans – a 25-basis-point minimum – regardless of the loan’s performance, so non-performing loans, which are much more costly to service, receive no additional compensation.
“Performing loan servicing is primarily a payments processing business,” the agency stated in a report. “In contrast to performing loan servicing, non-performing loan servicing is very labor intensive, and does not have economies of scale benefits typical of performing loan servicing.”
Edward DeMarco, the acting director of the FHFA, reiterated that commitment in a speech in April.
“[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.”
But as HousingWire noted, few in the industry are even tempting the agency’s suggestions, and so strong is the resistance that some are wondering if the FHFA will abandon its plans.
The appeal of the current compensation system is its flexibility. Creating mortgages creates mortgage servicing rights, and the two operate independently of one another. So, though a lender can sell the right to a mortgage to another financial institution, it can retain the servicing rights and continue to manage the mortgage’s payments – and any charges (such as late fees) that accompany it. Under a more free market system, however, that scenario could no longer work.
Heft did say, though, that dialogue between the agency and industry is ongoing, and that many of the industry’s letters to the FHFA requested additional analysis of any other compensation methods.
One method servicers were warmer towards, HousingWire reported, was a cash reserve structure, which would involve existing fees being used as reserves for any future economic mishaps.